What is a Restrictive Covenant?

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More organizations in today’s competitive global economy are adding a post-employment restrictive covenant in written contracts for new hires.

In short, restrictive covenants are contractual clauses designed to limit a former employee’s ability to assist the company’s competitors following termination. Employers typically impose restrictive covenants to protect their trade secrets, safeguard their market influence, and maximize their investments. These post-employment provisions are particularly common for senior-level jobs where employees have greater access to the business’s confidential data.

HR departments tailor their restrictive covenants based on their specific industry needs and the context of the employee’s position. If you’re interested in becoming a human resources manager, here’s everything you should know about restrictive covenants in the hiring process.

Types of Restrictive Covenants

There are four main types of restrictive covenants that human resources departments often implement in employment contracts. First, non-competition covenants restrict employees from working in a similar capacity for an industry competitor following their termination. Non-solicitation covenants are in place to prevent past workers from stealing the company’s client base or suppliers. Similarly, non-poaching covenants stop former employees from taking along colleagues when they depart the organization. There’s also the non-dealing covenant, which curbs previous employees from dealing with former customers in any manner. Most will also contain a confidentiality clause for employees to agree they’ll never share private information. Restrictive covenants may focus on thwarting the major HR issue of team moves too.

Establishing Solid Restrictive Covenants

For restrictive covenants to be enforced by court judges, they must be strategically drafted with a narrowed focus on protecting company assets. There are a handful of criteria that must be met for the provisional clause to be held justifiable. Of course, there has to be a predetermined period of time for restriction. Most covenants are held to six to 12 months. Restrictive covenants must specify a certain geographical area for the limitations. For instance, the contract may forbid former employees from joining competitors within 50 miles. HR managers must also clearly state which types of interests are being protected, such as trade secrets or customer contact information. Covenants may need to be periodically reviewed to maintain enforceability.

Adding in Garden Leave Clauses

It’s common for companies to add a so-called “garden leave” clause into an employee’s restrictive covenant to maximize its power. Garden leave clauses require terminated workers to spend all or part of their notice period at home while receiving their normal wages. Inserting a garden leave clause can be beneficial for organizations to prevent employees from joining competitors while allowing successors to get their bearings. Former employees on garden leave won’t be privy to the latest confidential data, so information they’ve already obtained will become obsolete. Garden leave is meant to last anywhere from a week to a couple months, but it shouldn’t be unduly long.

Resource: Is a B.S. or a B.A. Better for a Career in Human Resources?

Overall, businesses often will restrict the use of their integral information by employees after vacating their role to protect their position in the market. HR managers should be familiar with how to draft restrictive covenants that are reasonable, unambiguous, and strong enough to hold up in court. Legal actions resulting from contractual breaches can take a significant amount of time due to the need to collect credible, unbiased evidence of wrongdoing. However, having a restrictive covenant can defend organizations against being back-stabbed by former employees.