Restrictive Employee Agreements
There are three main “employee” contract law covenants that are used to protect an employer’s confidentiality, trade secrets, and business interests. A non-compete agreement prohibits certain activities that compete with a business, a non-disclosure agreement forbids the revelation of confidential information, and a non-solicitation agreement prohibits solicitation of a business’s clients, customers, employees, contact lists, etc. These agreements are often wrapped up together in one document however they can be signed separately. In some cases, non-compete and non-solicitation clauses are included in termination paperwork.
As faced by many of our European clients, a common question many US employers face during any layoff, is: How enforceable are these agreements when an employee has been terminated?
A non-compete states that an employee cannot become employed with a competitor or otherwise “compete” with their former employer, within a specific industry, time limit, or geography. However, these agreements can be found to be unenforceable if the restricted individual can show that they are not reasonable, (for example, an unreasonable length of time or geography).
Any employer considering a layoff or furlough should consider the impact of COVID-19 on existing non-compete agreements. For example,
- a non-compete could be void if it involves an essential business as the public interest outweighs that of a former employer
- a pandemic, it could be argued, is an Act of God and thus could invalidate a non-compete
- a non-compete agreement could be deemed as unreasonable because of the high unemployment rate resulting from COVID-19 measures
- many non-competes are already not enforceable if an employee was terminated not for cause (wrong- doing)
Enforceability of Non-Compete Agreements (in normal times)
Most U.S. states recognize and enforce various forms of non-compete agreements. A few states, such as California, Montana, North Dakota, and Oklahoma, totally ban non-compete agreements for employees, or prohibit all non-compete agreements except in limited circumstances. **
Enforceability of Non-Solicitation and Non-Disclosure agreements
These agreements will likely perform more favorably for an employer as they are more reasonable, less burdensome and are not as likely to restrict an individual’s ability to work.
It is extremely important for both the executive search firm AND the employer to specifically ask candidates, very early in the interview process about any restrictive agreements that they have signed with a current/previous employer.
Employers should always seek legal advice regarding the application of restrictive covenants during the hiring process, as they need to be both well drafted and reasonable to be truly enforceable.
Hiring is the most important decision a company can make, no matter what industry one is in. If your company is seeking to recruit for a key position, such as CEO, COO, President, VP or other Senior level role, have a conversation with DSML Executive Search to ensure your search includes a “thorough” process and a “success based” strategy.