Drafting Post-Employment Restrictive Covenants

If you are drafting up employment agreements with your startup’s key first employees, you may want to include post-employment restrictive covenants. Such covenants include: non-compete agreements, restricting former employees from seeking employment in the same role or trade; non-solicitation agreements, restricting former employees from attempting to take any of your company’s clients to a new company; and no-hire agreements, restricting former employees from offering employment in another venture to any of the company’s current employees.

However, it is also well-known that such restrictive covenants must also be limited in order to be enforceable. As a general rule, the extent of post-employment restrictive covenants must be reasonable and necessary to protect the legitimate business interests of the employer. Factors considered by courts in determining whether covenants actually serve to protect solely the business interests of the employer include: (1) hardship to the employee; (2) geographic and temporal scope; (3) activities restricted; (4) effect on public interest.

Therefore, it’s not about what ifs and what would be nice, but rather what activities would actually threaten the interests of the employer — for example, while it would be nice to restrict an employee on a regional or national scale if your company expands, if your company is currently only operating in Massachusetts, then only a restriction on Massachusetts (and maybe even only a region within Massachusetts) would serve to protect the legitimate business interests of the company.

With non-compete agreements in particular, it seems as though courts consider hardship to the employee as the primary factor. If a non-compete would serve to effectively keep a person out of work in their trade or career, courts will be highly reluctant to enforce such an agreement. For example, a non-compete with a software engineer restricting him or her from serving as a software engineer in Eastern Massachusetts effectively prevents that person from obtaining work in their trade for the duration of the agreement, at least not without uprooting and moving somewhere else. This is an unacceptable result to most courts, so the restriction will have to be more narrowly tailored.

Restrictive covenants, particularly non-compete agreements, are narrowly construed by courts and almost always in favor of the employee. Furthermore, the burden of proof is almost always upon the employer to show the reasonability and necessity of the covenant. However, courts will sometimes “blue pencil” restrictive covenants; that is, narrow a restriction in order to make it more reasonable and therefore enforceable. But not all courts do, and if a court finds that narrowing a restriction to the point of reasonability would cause it to lose any effectiveness, they may choose to void the agreement altogether.

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