A Guide to Employment-Related Restrictive Covenants

It is common for businesses across the U.S. to turn to restrictive covenants with the aim of safeguarding their interests. This may include confidential information, trade secrets, talent pool investments, and even customer goodwill.  These covenants vary significantly in scope, ranging from highly restrictive non-compete agreements to fairly simple non-disclosure agreements. Attorneys who specialize in commercial law tend to have the required know-how when it comes to restrictive covenants.

Types of Restrictive Covenants in Employment Agreements

Most employment-related restrictive covenants fall into one of four categories.

  • A non-compete agreement prohibits a former employee from working for a competitive business for a predetermined time period.
  • A confidentiality agreement prohibits an employee from disclosing confidential or proprietary information.
  • A non-solicitation of customers’ agreement prohibits a former employee from soliciting a former’s employer’s customers for a predetermined time period.
  • A non-solicitation of employees’ agreement prohibits a former employee from soliciting a former’s employer’s employees for a predetermined time period.

Can Employers Use Restrictive Covenants in California?

While enforceable in most American states, California has an outright ban on the use of non-compete agreements by employers. North Dakota and Oklahoma are the other states that have banned this practice completely.  Rhode Island, Washington, Illinois, Massachusetts, and Washington D.C. also have restrictions surrounding the use of restrictive covenants in employment agreements.

What About Non-Disclosure Agreements?

Non-disclosure agreements (NDAs) are legal and enforceable in California. However, vague NDAs have little chance of holding up in a California court. An NDA should ideally have:

  • A statement that describes the NDA’s purpose
  • A statement that assigns rightful ownership of information
  • Details/description of information that’s meant to be kept secret
  • Instructions that an employee needs to follow to safeguard sensitive information
  • The time period for which an employee needs to adhere to an NDA
  • A statement that specifies what action an employer might take in the event of a violation

What if an Out-of-State Business Hires Employees in California?

If your business is headquartered outside of California and you plan to hire an employee or an independent contractor from California, make sure that the employment agreement does not have a restrictive covenant or non-compete clause. This is because California Business and Professions Code section 16600 clearly states that any contract that restrains anyone from “engaging in a lawful profession, trade or business of any kind” is void. It also prohibits partial restraints on the ability of an employee to practice any profession.

If your employment agreement with an employee in California contains a restrictive covenant, know that you may be exposed to a lawsuit. As a result, it’s important to ensure that your employment agreements with employees in California do not contain any restrictive covenants.

Conclusion

Out-of-state businesses that have been at the receiving end of lawsuits because of restrictive covenants they included in their employment contracts with California-based employees should seek legal assistance at the earliest. Employees who have been subjected to non-compete agreements or ambiguous non-disclosure agreements might also benefit by determining where they stand from a legal point of view.

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