What Is the Purpose of a Restrictive Covenant?
While the term “restrictive covenant” might be a bit esoteric, it is easy to understand what it means. Many people don’t realize that the word covenant means an agreement. With that piece of the puzzle in place, it is easy to see that a restrictive covenant is a kind of agreement that restricts one of the parties.
Restrictive covenants can appear in several different fields. They are quite common in real estate, for example, where they are used to set limitations and restrictions on things like landscaping, fence heights, building heights, the number of vehicles allowed, and just about everything else you can think of.
The way that most people encounter restrictive covenants is through their employment. An employer may include restrictive covenants as part of the paperwork new employees must sign. There are several common clauses that are used in this way. We’ll discuss these in more depth in a moment.
For an employer, a restrictive covenant is a way of protecting their business interests. They may use them to prevent an employee from working with them during their training, then take what they learned to another company instead. Keep in mind, however, that new laws have made it harder for employers to use restrictive covenants on their employees. We’ll discuss these more after we explore the types of restrictive covenants.
What Types of Restrictive Covenants Are There?
Restrictive covenants come in a few forms, though they all have the same ultimate goal. Whether you are talking about a non-compete clause, a non-disclosure agreement, or a non-solicitation clause, the purpose is to protect the employer and their investment in their employees, customers, and trade secrets.
The types of restrictive covenants that an employee is likely to encounter include (but are not limited to) the following:
- Non-Compete Clauses: Non-compete clauses are considered to be the most restrictive of the common clauses. As such, they are also the hardest to enforce. Non-complete clauses are designed to prevent an employee from seeking employment from a business within the competing field. Non-compete clauses can be written to be very specific or very broad.
- Non-Solicitation of Customers: Non-solicitation clauses are much easier to enforce compared to non-compete clauses, primarily because they are a lot less restrictive. A clause that prevents the solicitation of customers is designed to stop employees from poaching clients from their employer.
- Non-Solicitation of Employees: These clauses prevent the signer from trying to poach employees from a company. For example, a tech start-up might include this clause because they are getting a bunch of talented engineers together, the type of people that might quit to pursue their own app idea. If that happens, they want to only lose one employee, not half their staff.
- Non-Disclosure Agreements: Non-disclosure agreements are not very restrictive. They are designed to prevent people from revealing trade secrets ahead of schedule or to keep those secrets out of competitors’ hands. It is important to note, however, that an NDA is not intended to keep a crime secret. If an employer has you sign an NDA to stop you from contacting law enforcement or the labor board, they are only further breaking the law by trying to trick you into silence.
Can an Employer Demand Any Restrictive Covenants They Want?
There are very specific laws that specify when an employer is allowed to use a restrictive covenant and what they are allowed to demand in this manner. Before getting further into it, a good rule of thumb is to trust your gut. If a demand seems unreasonable, then it is worth flagging and having an attorney look over it before signing.
If you make less than $75,000 a year, your employer should not ask you to enter into a non-competition agreement. They may ask, but they could not legally enforce that clause. Also, you can’t enter into a non-solicitation agreement unless you earn more than $45,000 a year.
Let’s say, for the sake of an example, that you make $100,000 in a year. You could be asked to sign non-competition and non-solicitation agreements. Even in this case, your employer would still have to prove that there was adequate consideration. This means that there has to be some reason for the employee to sign the agreement. If they are to work for two years after signing, this would count.
But this means that an employer can’t just subject their employees to restrictive covenants as they want. They must be in a position to legally do so, and even then, they must have a legally acceptable reason for doing so.
What Happens If You Breach a Covenant?
Breaching a covenant can be a weird experience. For some people, it means that nothing happens. For others, it can be a very expensive mistake.
When you breach a covenant, you leave yourself open for legal action. The other party may deem the breach to not be worth their attention, in which case you would be liable, but nothing comes of it. If they decide they want to enforce the covenant, then you will be taken to court.
If they can prove that the covenant is legally enforceable and you have indeed breached it, then you could face the consequences depending on what covenant you broke, how you profited from it, how it affected the other parties, and other relevant factors.
What Should I Do If I Suspect My Employer Had Me Sign an Unreasonable Restrictive Covenant?
Since an employer has to follow specific rules regarding restrictive covenants, there is a good chance that the restrictive covenant is not enforceable. However, the only way to be sure about that is to speak to an experienced attorney and have them look into the matter for you. Make sure you bring a copy of the relevant paperwork.
On the other hand, if you are an employer that is looking to make use of a restrictive covenant, then you should also contact an attorney. They will be able to help you to write your clauses in a way that ensures they are legally enforceable.