To a large degree, employment contracts focus on clarifying the obligations that workers and the companies that employ them have to one another. Contracts tend to discuss what services the employee will provide and what compensation the organization will offer.
An employment contract may also outline key company expectations and policies. Sometimes, those expectations involve behavior outside of the direct employment relationship. It has become increasingly common for businesses to also include restrictive covenants in their employment contracts to limit liability when hiring new workers.
What do restrictive covenants do?
A restrictive covenant limits what an employee can do outside of their employment, often even after severing the employment relationship with the organization. The best-known restrictive covenant is likely the non-compete agreement, which prevents workers from going to work for a direct competitor or starting a business in the same geographic region and industry.
Non-disclosure agreements are also relatively common, and they prohibit workers from sharing private information about the organization with others, including on the internet. Finally, non-solicitation agreements are popular inclusions that prevent workers from trying to take clients or employees from an organization when they leave.
How do restrictive covenants function?
Essentially, a restrictive covenant prohibits certain behavior and potentially imposes a specific penalty should an employee violate the agreement. The employer, upon learning about a violation, can then potentially take legal action against the worker. If they bring a successful case in civil court, they could secure any penalties included in their agreement and possibly also damages when applicable.
The more that an organization’s success of competitive edge depends on trade secrets, the more important protecting such secrets becomes. Where a company operates can influence what kinds of restrictive covenants they use. Some companies, nervous about reform pressure at the federal level, may prefer to avoid non-compete agreements due to the possibility of a future ban.
The most effective employment contracts include unique terms based on the company’s needs and the unique position a new hire will fill. Integrating restrictive covenants into employment contracts with the assistance of an experienced legal professional, especially for those in positions of authority or creative leadership, can potentially help protect an organization from the damage that employees can cause.
