In a prior 2010 publication, I highlighted common mistakes that threaten the enforceability of non-compete agreements. Much has changed since then, so here is a revised list with suggestions for best practices to avoid related trouble.
Mistake: Confusing the different types of post-employment restrictions
Judges, lawyers, and business professionals often use (and sometimes confuse) different terms to describe different types of post-employment contractual restrictions. These include “non-compete” restrictions in which the employee promises – for a limited period of time and within a certain geographic area – not to work at all for a competing company after departure. Employers also often obtain agreements that contain “non-solicitation” restrictions, which prohibit former employees for a period of time from trying to divert employees and/or certain clients from the company. These “non-solicitation” restrictions can also sometimes be referred to as “non-interference” or “non-piracy” restrictions. Finally, many employers also require employees to sign agreements with “non-disclosure” restrictions, which prevent former employees from divulging or utilizing the employer’s confidential information.
Best practice: Label all such agreements as “Restrictive Covenant Agreements”. In most situations avoid using “non-competition” labels or restrictions. Use “non-interference” language to include those restrictions that prohibit a current or former employee from doing business with select customers (as described more fully below) and from encouraging the Company’s employees to depart. Similarly, use “non-disclosure” language to include those restrictions aimed at protecting the Company’s confidential information.
Mistake: Using the same agreement in multiple jurisdictions
The laws can be very different from state to state and your agreements should take account of those differences.
Best practice: Obtain guidance from Company counsel regarding differences in the laws in all areas in which employees will be asked to sign restrictive agreements and modify agreements accordingly. This is particularly important in our remote work environment.
Mistake: Failing to update your agreements to comport with changing law
Laws change and judges’ interpretation of the laws evolve.
Best practice: Keep current on changes in the law through seminars, publications and communications with counsel. Have counsel assist in updating restrictive agreements as necessary.
Mistake: Requiring that all employees – from executives to low level hourly employees – sign a restrictive covenant agreement
Restrictive covenant agreements should be utilized only where necessary to protect legitimate business interests, such as customer goodwill. There is no real goodwill between customers and the custodian (as example) and likely no real need to limit his or her post-employment activities. Further, and importantly, in 2019 a new law went into effect in New Hampshire that invalidates certain post-employment restrictive covenants, including non-compete restrictions, in agreements entered into (or renewed) with low-wage workers (i.e. those earning less than or equal to two times the federal minimum wage) after the 2019 effective date of the law.
Best practice: Spend time realistically assessing what legitimate interests (e.g. customer goodwill, confidential information) are at stake and identifying those non-low-wage workers who need to be restrained in some reasonable way in order to protect those interests.
Mistake: Overreaching in agreements with the expectation that courts will lessen the restrictions where appropriate, but otherwise enforce them.
Courts are increasingly unwilling to scale back agreements (often referred to as “blue penciling”) that are obviously too broad in scope or duration, or that are otherwise obtained in ways the court determines to be unfair. In these instances, courts may refuse to enforce any part of the agreement.
Best practice: Ensure that the restrictions are only as tough as needed to protect legitimate interests. So, for example, an employer may restrain a former sales employee’s ability to solicit former customers with whom she interacted or about whom she gained confidential information, but should not try to restrain her from doing business with all of the Company’s customers.
Mistake: Failing to adopt sound implementation practices
It is not enough for employers to obtain good, up-to-date agreements. They must also adopt and consistently employ sound implementation practices. Otherwise, even good agreements may be deemed invalid.
Best practice: In addition to advising all prospective new hires that they will be required to sign agreements with post-employment restrictions and giving them a copy of the agreement before they accept the offer of employment, the employer should (a) give incoming employees time to review the agreement carefully — with counsel (at the employee’s expense) if they so choose; and (b) make sure new employees sign the agreement before commencing work.
Mistake: Failing to include a tolling provision in your non-compete agreement
Tolling provisions typically extend the restrictive time for all periods of breach to ensure that the employer receives the full breach-free period for which it bargained. Employers are encouraged to include a tolling provision in their agreements if they wish to receive the benefit of a full restrictive period free from a former employee’s breach.
Best practice: Have your attorney confirm that your restrictive covenant agreements contain a simple tolling provision, such as the following:
“Should Employer have to commence legal proceedings to enforce rights arising out of this Agreement, the period of restriction shall be extended for all periods of time in which Employee is in breach of his obligations….”
Mistake: Not referencing non-compete agreements in separation agreements
There are two important reasons why employers must be mindful of restrictive covenant agreements when entering into separation agreements with departing employees. First, because employers typically provide severance and other benefits as part of the separation agreement, it is a good idea to use that additional consideration to fortify the pre-existing post-employment restrictions. Second, separation agreements often include what are known as “integration clauses,” which eviscerate all other agreements, oral and otherwise, that might exist between employee and employer, unless specifically referenced in the separation agreement. An employer who ignores the restrictive covenant agreement in the separation agreement may be surprised to learn later than it has unwittingly allowed the integration clause to destroy the restrictive covenant agreement.
Best Practice: Incorporate into a separation agreement a restrictive covenant agreement by referencing it or even making it a specific exhibit to the separation agreement.