Post-employment restrictive covenants in PA come in multiple varieties. But the non-compete covenant is the most burdensome of all.
Most people have heard, and are likely familiar with, the term non-compete, which is one type of restrictive covenant. It's not uncommon for an employer to ask an employee to sign a non-compete clause, which limits competing for employment after the employee's current job ends. For example, you may have heard of non-competes because of high-profile cases involving executives or broadcast personalities invited to join a competing employer.
But, media spotlight aside, post-employment restrictions come in multiple varieties, and the non-compete covenant is the most burdensome of all post-employment restrictive covenants. Other limits that are easier to create and manage may serve an employer just as well.
What's the Purpose of a Restrictive Covenant?
At their core, restrictive covenants contain four types of promises:
- A promise not to compete with a former employer
- A promise not to solicit or accept business from customers of the former employer
- A promise not to recruit or hire away employees of the former employer
- The promise not to use or disclose the former employer's confidential information.
Typically, the duration of restrictive covenants ranges from 1-2 years for employment and 5-10 years for the sale of a business. In addition, covenants must be limited to where the company conducts business and the employee's responsibilities. However, no geographic scope is necessary for a non-solicitation of customers or employees.
A Restrictive Covenant Requires a Legitimate Purpose
Three states prohibit employers from asking their employees to sign restrictive covenants, including California, Montana, and North Dakota. In addition, California prohibits the non-solicitation of customers. Note that Pennsylvania recognizes only the first two types of non-competes presented below.
In the remaining jurisdictions, a restrictive covenant is enforceable only when serving a legitimate purpose. Moreover, the covenant must be reasonable in scope, geography, and time. Although limitations vary from state to state, most jurisdictions apply this framework for determining legitimate purposes:
- The covenant preserves confidential information
- It protects customer relationships
- And it preserves goodwill
For the most part, continued employment is sufficient consideration to support the covenant. But some states require an employer to offer additional consideration, for example, through a signing bonus or severance.
7 Types of Restrictive Covenants
From a broad perspective, we'll address seven types of restrictive covenants. Whether each is enforceable or not, and to what extent, depends mainly on state laws. However, most states impose varying rules on what specific types of clauses are allowed in restrictive covenant agreements. You can learn more about the enforcement of restrictive covenants here.
1. Non-Compete Covenant
It prohibits an ex-employee from working for a competing employer for a stated period after leaving a job.
2. Specific Non-Compete Covenant
This restrictive covenant is narrower. It keeps the ex-employee from doing business with customers for a set time. But it does not prohibit working for a competitor.
3. Customer Non-Solicitation Covenant
A less strict type of restrictive covenant, the customer non-solicitation covenant, prevents the former employee only from initiating contact with customers (or even prospects) after leaving a job. However, a non-solicit does not bar an ex-employee from doing business with a customer that initiates contact with the ex-employee.
4. Employee Non-Solicitation Covenant
Sometimes called an anti-piracy clause, these agreements prohibit ex-employees from soliciting other former co-workers from joining the new employer. Unfortunately, the courts hesitate to enforce anti-piracy clauses without evidence of an intention to destroy a competitor.
5. Confidentiality or Non-Disclosure Covenant
This restrictive covenant prohibits ex-employees from using or disclosing the employer's confidential business information. Technically, these clauses are not essential to protect confidential information. For example, trade secret law, now embodied in the Pennsylvania Uniform Trade Secrets Act, does this job as well. But many employers also want an explicit prohibition on misuse of employer secrets to bolster any trade secret claim.
6. Garden Leave
The newest type of restrictive covenant is the "garden leave" requirement. This "pre-post-employment" restriction is most common in high-end financial services work. Once the employer has notice of an employee's impending departure, the employer sends the employee home to "the garden" for an extended period.
During garden leave, the employee remains on the old employer's payroll. However, they may not perform work for the old or new employer. In addition, they may not contact clients or customers. The employer uses the employee's garden leave to cement relations with the employee's clients, so the clients do not follow the ex-employee to the new employer. A variation on garden leave is "bench pay." Here, an employer has to pay an ex-employee who can show that the non-compete has prevented acceptance of a new position during the restricted period.
7. Assignment of Property Rights
The seventh restrictive covenant is the assignment of property rights. Generally, the rights to own, patent, copyright, or trademark items happen during employment. This assignment is essential where an employee develops inventions of possible value to the employer.
Have Questions About Restrictive Covenants?
This article serves as a basic introduction to the types of restrictive covenants. But, if you need more information, including what it takes to draft and enforce a valid restrictive covenant, contact Thomas Rees via email at email@example.com.
The information above is general: we recommend you consult an employment lawyer at our Doylestown and Norristown law firm regarding your circumstances. You should not consider the content of this information as legal advice or a substitute for legal representation.