Business Law - Question #3:
What are “normal” restrictions in an employment agreement?
Whether it is your first time receiving a formal employment agreement or you have gained familiarity and experience with common employment contract provisions, every employment agreement is unique and can greatly impact the life of the employee. Variations in employment agreements are necessary due to the type of profession or industry as well as the specific job responsibilities described in the agreement. However, sometimes provisions require particular review to ensure that they are as close to “normal” or reasonable as possible. Some of the most frequent anxiety-producing provisions are the constraints placed on the employee both during and after their employment known as the “restrictive covenants.”
Restrictive Covenants - what are they?
Restrictive covenants, in the employment context, are outlined restrictions or limitations placed on the employee's actions during their employment and often for a designated period following the end of their employment with the employer. By signing the employment agreement, the employee agrees to be bound by these limitations just like they agree to complete their described job duties. These restrictions are negotiated as part of the exchange for the salary or other payment terms outlined in the agreement.
3 Common Restrictive Covenants
Typically, the most familiar restrictive covenant, non-compete provisions limit the employee from acting in certain ways that may “compete” with the employer's business. This may be through the employee acting independently or in the service of another company which provides similar or identical services to those of the employer's business.
Example: A dental practice may include in their employment agreement that an employed dentist shall not offer dental services to any other patient outside of their employment with the dental practice.
Non-solicit provisions generallyapply to customers, patients, and clients of a business, as well as other employees of the business. This restrictive covenant limits the employee from “stealing” or “soliciting” the customers or employees of the employer.
Example: A landscaping company may limit its employees from personally contacting current customers to offer similar landscaping services. Through the non-solicit terms, the company may also prevent an employee from employing his or her co-workers to perform the same services.
Through non-disparagement provisions, employers attempt to limit employees from circulating negative messages about the employer or the employer's services, particularly after the end of the employment term. This is not necessarily limited to published comments, such as in newspapers or online posts, so the application of non-disparagement provisions can sometimes be far reaching.
Example: A restaurant may include non-disparagement provisions in its employment agreements for chefs and managers which prevent such employees from criticizing the restaurant's recipes or cooking methods.
Although the reasons supporting restrictive covenants are often important to the success of an employer; it is vital for potential employees to consider how broadly the covenants are defined and applied in the agreement. North Carolina law uses a subjective standard for evaluating the effectiveness of restrictive covenants, so it is important to have an attorney review these provisions prior to signing an employment agreement. Common factors used by the court to gauge reasonableness include:
1. The duration of the restrictive covenant period;
2. The location or area where the provisions apply; and
3. The level of job responsibility or compensation for the employee in comparison to the restrictions outlined.
The employment relationship is an important one for both parties to enter with clear direction. Contact us before signing or asking your employees to sign a new employment agreement. Our attorneys regularly advise both employers and employees and take care to discuss employment goals and guide our clients with respect to restrictive covenants.
Check back regularly for continuation of our FAQ Series on the blog! We will cover the frequently asked questions from our Practice Area pages in more depth. Please connect with our team or contact our office if you have any questions or to learn more.
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