Every new employee that an organization hires is a potential source of liability. They might make a mistake while manufacturing goods or providing services which then leads to lawsuits against the organization. They might harass or discriminate against coworkers. They could also potentially damage the organization’s reputation or reduce its competitive advantages by misusing information and relationships acquired through their employment.
Formal employment contracts are a key form of protection for organizations that hire workers. Restrictive covenants often play a major role in preventing unfair competition and inappropriate disclosures that could harm a business later. The three restricted covenants below are popular inclusions in modern employment contracts.
1. Non-compete agreements
Non-compete agreements are probably the best-known restrictive covenant. Workers in many different professions and industries may be subject to a non-compete agreement when they leave their job.
Non-compete agreements prevent a worker from taking a new position with a local competitor or starting a competing business.
2. Non-solicitation agreements
Workers can often use the relationships that they developed while employed at a company for personal financial gain after leaving the company. They might keep a list of clients or customers and then try to do business with those people later. Such conduct would likely diminish the market share of their former employer.
Other times, workers who leave a company may try to convince others to join them at a new business or hire them at an organization they just started. Non-solicitation agreements can prevent workers from trying to take staff or customers away from a former employer.
3. Non-disclosure agreements
Non-disclosure agreements prevent employees from sharing private information about the business with outside parties. A non-disclosure agreement can prevent someone from sharing information about company operations on the internet or giving details about trade secrets to future employers after they leave a job.
In general, most civil courts do enforce reasonable restrictive covenants if employees violate them. Businesses need to integrate appropriate limitations on restrictive covenants if they want to enforce them later in court. Terms limiting the duration of the restrictive covenant and the geographic area to which it applies are typically necessary. Employers usually also need to show that workers received something of valuable consideration in return for giving up certain rights.
Adding the right clauses to an employment contract can significantly reduce the risk inherent in hiring new employees.