Business-Minded Legal Solutions

Can a restrictive covenant be harmful to business owners?

Restrictive covenants – non-disclosure, non-solicitation and non-competition agreements  – are common contractual terms for many employers handling sensitive trade secrets or confidential information. Agreements containing these covenants must walk a fine line to be enforceable and not discouraging to employees.

Too restrictive can be unenforceable

While non-competition agreements are protective measures, if an agreement goes too far, then you cannot enforce it. Some jurisdictions have declared most non-competes to be unenforceable. Even in those jurisdictions where non-competes are enforceable, among other considerations the non-compete covenant must contain reasonable limitations on:

  • Time: The length of time that the covenant is in effect
  • Territory: This can be specific physical boundaries and/or customers or companies to which the covenant applies
  • Scope: The actions that the covenant bars the employee from doing

A blanket non-competition covenant that bars a former employee from using their skills in perpetuity generally may be successfully challenged.

Non-solicitation covenants agreements that restrict a former worker from approaching or “poaching” customers are a type of non-competition covenant and generally have the same legal limitations.

Any restrictive covenant may be a non-starter

The “great resignation” is still on, and many workers have taken the very favorable employment market as an opportunity. In this environment, even those restrictive covenants that have been common asks may meet skepticism. That does not mean you should abandon your policies, but it should be a consideration in your hiring efforts.

Delicate, deliberate choices

To build the restrictive covenants that work best, you must fully understand your priorities and the legal environment in which you are operating. Blindly drafting restrictive covenants can end up hurting an employer more than helping.

Crafting the right limits that protect your business is not simple. It requires a thorough understanding of applicable laws and your business.