Employers Should Fix These 8 Common Problems With Restrictive Covenants

The Legal Intelligencer

(by Brian D. Lipkin and Carly Loomis Gustafson)

When an employee quits, the employer might dig through its files, dust off an old noncompete agreement, and see what rights (if any) it has under the agreement. Does this scenario sound familiar?

Unfortunately, by the time an employee has quit, it’s too late to go back and correct an outdated or insufficient agreement. So, we recommend that each fall, employers look through their existing noncompete agreements (and other restrictive covenants, such as nonsolicitation agreements), and fix these eight common problems:

Problem No. 1: Over the years, the employee signed multiple, conflicting agreements.

Fix: When an employee signs a new agreement, it should clearly state that it replaces all previous agreements.

Problem No. 2: The employee did not receive consideration—such as a new position, raise, bonus or promise of employment for a fixed time period—in exchange for signing the agreement.

Fix: If an employer realizes that an employee may not have received adequate consideration, the employer can pay a bonus in exchange for signing a new agreement. By timing its review of restrictive covenants in the fall, an employer can prepare for employees to sign updated agreements when they receive year-end bonuses or raises.

Problem No. 3: The agreement doesn’t detail what the employee is restricted from doing.

Fix: We often see agreements that prohibit an employee from going to work for a “competitor.” The problem with this language is that it inevitably leads to a dispute about whether the new and old employers really compete with each other.

If an employer is concerned about employees leaving for specific companies, those companies should be named in the agreement. The employer should add that the named companies are only examples, and that the employee is also prohibited from going to work for other companies doing business in a defined industry.

Problem No. 4: The employee’s position, or the employer’s business, has changed since the agreement was signed.

Fix: The employer should consider the restrictions in the original agreement, and confirm they still make sense. For example: since signing the agreement, does the employee still work in the same line of business, in the same geographic area? Does the employee still hold the same position, or have they changed responsibilities or gotten a promotion?

What about the employer—has it moved, closed locations or opened new locations that now need to be protected? Has the employer entered new lines of business, or is it preparing to do so? Does it face any new competitive threats?

Problem No. 5: The agreement limits an employee’s ability to compete, but it’s missing other restrictions.

Fix: Employers often refer to all types of restrictive covenants as noncompete agreements. But, a restriction on an employee’s ability to compete may not go far enough, so the employer should consider adding other restrictions.

Nonsolicitation provisions can restrict employees from going after customers, other employees and referral sources. The employer can even require an employee to stay away from named customers and individuals, but should add that they are only examples.

Employers should also consider including confidentiality provisions, (which do not need to be supported by consideration).

Problem No. 6: The agreement doesn’t define what it means for an employee to “solicit.”

Fix: To avoid any doubt, the agreement should restrict an employee from attempting to do business with any customer, other employee or referral source—even if the other person contacts the employee first. The agreement should also restrict the employee from engaging in solicitation indirectly, through another person.

Problem No. 7: The agreement contains unenforceable restrictions.

Fix: Pennsylvania courts enforce restrictive covenants, to the extent they are necessary to protect a legitimate business interest. The employer should think about whether it could explain to a future judge why it really needs the restrictions to protect its business.

Does the employee’s position even require restrictive covenants? For instance, a sandwich chain infamously required its kitchen workers to sign noncompete agreements.

If an agreement is needed, does it limit the employee’s activities for six months or one year?  Courts in Pennsylvania generally enforce these time periods with respect to covenants not to compete and solicit. Longer time periods have also been enforced, but they can be harder for employers to justify.

Does the employer need to limit the employee’s activities worldwide or nationwide, or would a narrower geographic area be sufficient? An employer could consider restricting activities within particular states, counties or cities. Restrictions could also apply for a certain number of miles from locations of the employer and employee.

We recommend that employers include a “blue pencil” provision, stating that if a judge finds the restrictions are too broad, their scope should be limited so that they can be enforced.

Problem No. 8: The agreement doesn’t contain a mandatory “forum selection” provision identifying where any disputes over the agreement must be litigated.

Fix: The employer should add this provision, and identify the state and federal court that are most convenient for the employer. For a court to enforce this provision, the selected location would need to be reasonably related to the employer or employee.

By fixing these common problems, employers can put themselves in the best position to enforce noncompete agreements and other restrictive covenants in the future.

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