E5: Restrictive Covenants

In this episode, attorney Kathleen Jennings and host Thom Jennings discuss the types of restrictive covenants that employers need to be aware of when they are hiring a new employee.

Podcast Episode Transcript

Narrator (00:05):
You are listening to Cover Your Assets, a podcast that discusses the timely and significant legal issues faced by employers. Kathleen Jennings is an attorney who has over 30 years of experience in advising employers as to their legal responsibilities and has written extensively about employment law. Inner Popular Cover Your Assets blog. If your business has employees you cannot afford not to have your assets covered.

Thom Jennings (00:35):
Hello everyone and welcome to Cover Your Assets, the Employment Labor and Employment Law Podcast. I, I changed the title. I don't, I don't know if you remember this, but when it was first, we first came up with the title for Cover Your Assets, the podcast, it's named after our resident expert slash my sister Kathleen. I put the podcast up on all the different podcasts formats at Apple and Spotify and all that. And I noticed, I'm like, wow, there's a ton of cover your assets podcasts. They usually are about financial advice and things like that. And then I realize, I'm like, oh, well maybe I should change it to the Employment Law podcast. But I realize that your blog that this is based off of is the Labor and Employment Law podcast. Is that not correct?

Kathleen Jennings (01:24):
That is correct, Thom. So I'm very glad that you have corrected the name of the podcast

Thom Jennings (01:29):
And it's much longer. So we, we have something more to say every time than we start the podcast. But this week let's get to the topic. And it is an interesting one because it's one that I as usual have a story that goes along with it, but I think it's something

Kathleen Jennings (01:46):
I'm not surprised,

Thom Jennings (01:47):
<Laugh>. I think it's something that's very pertinent to a lot of people out there. And hopefully you can, I mean, you begin the, begin the podcast with maybe discussing the difference between, I know there's something called like a non non-compete and a non-disclosure. Is that the, is that the two types of agreements and what's the, or what are the, what are the, the qu our, our podcast topic and we like to be a little bit smoother at the beginning, but that's okay cuz we're, we're normal people. Is is about agreements that you sign when you start a new job and you, the non-compete, non-disclosure, non-solicit, that's the other one. That's the one that I was missing. So what are the three types? What are the industries that they typically affect? And I will let you take it away from here, sis.

Kathleen Jennings (02:37):
Well, Thom, what we like to call these in a group are restrictive covenants. They're covenants that restrict someone in some way in their employment or future employment. And as you correctly identified, we have types of restrictive covenants include non-compete agreements, non-solicitation agreements non recruitment of employee agreements, and non-disclosure or confidentiality covenants. Generally, the non-compete covenants are the type of covenants that say you cannot perform this type of work for the same type of company within a certain radius of distance from where you used to work. The second type, the non-solicitation is generally something that will prohibit an employee from soliciting the customers or clients of their employer for another entity. Like if they go to a new company they can't take, they can't then turn around and start soliciting the customers and clients that they did business with at their old employer.

Kathleen Jennings (03:54):
The non recruitment has to do with you can't recruit the folks that you worked with at your last employer when you move to a new employer and the non-disclosure or confidentiality prohibits an employee from disclosing confidential information. It's related to protecting trade secrets, but is there something that a company has that is considered confidential and the disclosure of which to a competitor would provide some sort of advantage to that competitor? The employer wants to take certain measures to protect that kind of information and prevent employees from disclosing it so the competitors don't get their hands on it.

Thom Jennings (04:42):
Okay. Well, let's, let's kind of dive into each one of these individually. I'll start with the non recruitment. And I, I guess the, the question that I would pose is that if, if you worked for a company and then you, you, I would assume this was, would pertain more to supervisors than say, you know, a regular employee. But, so I take a job at another company and I was a supervisor at company A, I go to company B, but then everybody, company a really loved me and they want to come along and work for me, which could potentially decimate the workforce of company A. Does company a have a legal recourse in terms of the non recruitment agreement? I mean, does the, is there responsibility in terms of the, of me of like a, like to say, oh, you guys can't come work for me, or are they able to, to come work for me of their own volition?

Kathleen Jennings (05:43):
What we like to distinguish between is active recruitment of those employees versus passive acceptance. And this will apply also to the non-solicitation of customers or clients. If you have a non recruitment covenant in your employment agreement and it's enforceable and everybody needs to know that all of these agreements are subject to state law, for the most part, every state has different laws that pertain to restrictive covenants. So it's very hard to come up with a one size fits all agreement that will be enforceable in all 50 states. So you have to know your state, you have to know your state law when you draft these covenants. So if you have an enforceable non recruitment covenant you are not allowed to pick up the phone and call these folks that you used to work with and say, Hey, come to work for me.

Kathleen Jennings (06:42):
However, if those folks pick up the phone and call you and say, Hey Thom, I hear you've gone to company B, I'd like to come over there too. Arguably you're not soliciting them. They wanna come over and work for you. So those types of agreements are, are hard to enforce because it's hard to distinguish between the active efforts. You, you may have a smoking gun, like an email. If you send an email out to all of the folks you used to work with that says, Hey, come work with me at company B, then you're gonna be in a bit of trouble. But for the most part, I hope that you would be smarter than doing something like that.

Thom Jennings (07:26):
So what's the recourse as far as, well, a couple of things. When an employer decides to draft an agreement non recruitment agreement, what are the elements that they, they should include? And also is there a benefit to an employer maybe looking for some kind of, you know, settlement or something like that? I mean, is it something that's worth pursuing if in in Indeed employee goes from company A to company B?

Kathleen Jennings (07:54):
I think the non recruitment covenants are probably among the hardest to enforce. What is more likely or what you're more likely to see employers try to enforce are the non-compete and the non-solicitation agreements. And if an employee or a former employee is actively acting in violation of those types of covenants or even, or the confidentiality covenant, that's also a very important covenant to a lot of companies. The first recourse of the company is often to go to court and seek an injunction against the employee, the former employee, and possibly also the company they're working with to stop whatever actions they claim the employee is engaging in to violate that agreement.

Thom Jennings (08:49):
So I, I guess to me, I think in terms of employers, one of the things that maybe they have to, to be acutely aware of is the potential of hiring an employee that has one of these agreements in place. So maybe that employee, you know I'm hiring somebody, I don't have a, a non recruitment or non-solicit or any of those types of things. Does the potential employee have an obligation to tell you if one of those agreements is in place? And I guess kind of the secondary question to that is, is would you advise employers when they're looking for new employees to include that as part of the hiring process?

Kathleen Jennings (09:35):
I think it's a good idea in any industry where these types of agreements are normal or routine for an employer to always ask an employee either after they've been given an offer of employment or af soon after hire, if they have really actually before hire, if they are a party to any type of employment agreement or any restricted covenants so that then the new employer can have their council look at that agreement and determine is there a problem. Because if the new employer is aware of the agreement and goes ahead and the employee, the new employee violates the agreement and the old employer goes after that employee, in some cases the new employer. And this does get kind of confusing, doesn't it? The new employer could be liable as well. So it is important for the new employer to be aware of these types of agreements and to have their own council review them to see whether these are enforceable covenants or, or what they can do about them.

Thom Jennings (10:44):
So I guess the question is which industries are the ones that usually have, I mean, where it's standard practice to have this restrictive covenants,

Kathleen Jennings (10:56):
Well tech it, those kinds of things. Anything with scientific secrets? Medical field, there's a lot of these doctors, hospitals have a lot of these types of agreements. Financial services have these agreements routinely. They're they can be anywhere. The, the issue is whether the employer has a protectable interest that they want to protect an employee from using to the employer's disadvantage if that employee leaves the company or even during the time that the employee is with the company.

Thom Jennings (11:41):
So I, yeah, I'm I'm curious, like at what point does if an employer have to notify an employee that one of these agreements is a condition of employment? And and I say this because let's, let's say there's a situation where, okay, so I'm, I'm at company A, I'm ready to go to company B, I apply to company B. Company B hires me. We go through the whole process. I give notice to company A, I get there, it's my first day of orientation, and then they slap this agreement in front of me and I go, whoa, <laugh>, wait a minute, you know, I didn't know that such an agreement existed and now I either have to sign the agreement or I've already quit the job at company A and company B is throwing this in front of me. Would the employee, if the employer did not put their ducks in a row, would they have a case to say that they signed these agreements under duress and maybe they would be unenforceable because of that situation?

Kathleen Jennings (12:43):
That is usually not a winning argument. Although obviously the employer has all of the power at this point, it really depends on the employee and what type of job they're taking. Higher level executives or higher level people with greater knowledge will have better bargaining leverage. But for the most part, the average employee will have no, say, they'll either have to sign this agreement or not start the job. And that's a choice they have to make.

Thom Jennings (13:18):
But, but, but I mean, I would assume that you would advise an employer to be as transparent about these types of agreements upfront. I mean, it would make, I mean, don't you think it would be ethically better for them to let people know during the, the hiring process or during the recruitment process, the interview process before they do a job offer that these types of agreements are going to exist?

Kathleen Jennings (13:43):
I don't know that that normally comes up unless the, the applicant asks about it. Hopefully if the applicant has done their homework on the company, they may find out that there are others at the company that have these types of agreements. But usually the agreements are, are given to a new employee at the time of hire or orientation. So yeah, if you've already quit your job at company A and then you have one of these agreements with company B why wouldn't you sign it at that point? Hopefully you're not planning on competing against this new company that you just joined, or are you

Thom Jennings (14:25):
Well, it, you know, it, I, it really is kind of a, a gray area because if you think about it, especially the, I mean if I work in a particular industry, so in your case, you're an attorney, I mean, and you have a, a certain clientele and you have a, a practice that is somewhat specialized. Correct? So if you were to go to another law firm, I would assume that you'd be doing the same type of work, at least in, in most cases. So if there was something like a non-compete agreement that would, that could put you in a very difficult situation, couldn't it, in terms of trying to find another job. And I believe that on some level that, that that could have an impact on whether these agreements are enforceable. Like if it, like if these agreements make it so that you cannot continue to work in the field that you are established in, then it doesn't matter anyway.

Kathleen Jennings (15:18):
Well, these agreements are considered for the most part to be in restraint of trade. So yes, they do restrict the ability of people to go to work for different employers in the same industry. And so you're absolutely correct, the ability of an employee to find other work or to have gainful employment is weighed against the protectable interest of the employer. And then again, there's different states have different ways of analyzing these covenants. It really, you have to know the law of the state that you're in so that you can understand whether a covenant is, is going to be enforceable or not.

Thom Jennings (16:03):
Yeah, because I mean, at, at, at, at its core, I mean, if you're going to look for an employee, I mean, ideally you're gonna hire somebody that has experience in the industry, and if you're gonna hire somebody in the same industry, I mean, chances are that they're gonna be with a competitor or at least with somebody who's doing the same type of work that you're doing. So I mean, I, I guess I understand why an employer, for instance, in the non-solicit, so I hire somebody to build my business up and they go to somebody else that, that does the same type of work that we do. I mean, the reality is, is that I paid for them while they were, while they were building their own sales portfolio and all that kind of stuff. And, and so I have a vested interest. I'm the one that came up with the company and they shouldn't just be able to, to capitalize on that and just take that whole book of business and bring it somewhere else.

Thom Jennings (16:56):
But again, it it, it seems to me like the problem's gonna be, you know, how do you determine whether, if somebody says, oh, you know, the the reason I do business with you is because of you as the individual or because of you as the company. So I think a lot of this can get very muddy. And I, I wonder if there's anything that you can do to kind of be proactive in terms of shaping these agreements where you don't run into those things where it really just becomes a back and forth between the, you know, the, the, the X employee and the employer.

Kathleen Jennings (17:33):
Well, it, in addition to shaping the agreements, and, and, and I can't emphasize enough, know your state law, know what's enforceable under your state law. A lot of what you look at is the actions after the employee leaves the old company we had, we were involved in some litigation where we were representing a small startup company and they were being sued by a large company in the same business because the small startup company one of the officers of the large company went to the small startup company, but didn't take any customers with him. However, the small startup company was doing so well that the large company thought, well, he must have taken customers with him because otherwise how would they do so well? So large company went out and got one of the largest law firms in the world. I'm kid you not, they had like three attorneys at every deposition.

Kathleen Jennings (18:37):
I, I don't even, they spent millions of dollars on this case and sued the smaller company. And there was absolutely no evidence that this guy took any customers with him. The reason the smaller company was doing better was because they offered better service, and that's why customers went to them. There was word of mouth and they were getting customers in a different sector of the business as well. But it costs them a lot of money too, just to have to fight this case. So sometimes the litigation is gonna happen just because maybe a company is unhappy that a competitor is doing so well in the same industry.

Thom Jennings (19:19):
Yeah, and I mean that's, it's, I guess it said that really pertains to it. It seems like a lot of specific industries. I I I, I know you mentioned like the healthcare industry. I mean, how would that come up in terms of what would that a doctor going to another hospital? Doctors,

Kathleen Jennings (19:35):
Doctors, when they, when they leave a practice, most doctors have agreements that limit their ability to practice within a certain mile radius from where they're currently practicing because the, the, the practice they're with or the hospital system they're with, doesn't want them to take the patients with them. But again, you come down to, you know, actively soliciting versus passively accepting, passively accepting customers is legal and not in violation of these covenants. So a lot of the litigation will center on, you know, what efforts did the ex employee make to reach out to people versus how did the customers or clients reach out to this person after they left.

Thom Jennings (20:29):
So I mean, in reality, I mean, I'm, and if you are going to leave a hospital or whatever, and you're a doctor, you're probably better off just to go to a, an area that's far enough away that you're not gonna have to deal with this kind of thing. Right?

Kathleen Jennings (20:43):
Yeah, I mean, the, the, usually the, the mileage is not that great. It's not like you have to necessarily move to another state or anything like that. They just don't want you close enough. By that, it's easy for the patients to just, you know, drive down the street.

Thom Jennings (21:01):
And I guess, we'll, we'll finish up with the non-disclosure agreements. And I, I mean, hon, I mean, my personal opinion is that I think that's kind of a no-brainer. So if you're working for a company and there's certain things that they're doing that are, that need to be protected, and this may not be a great example, but I think of like Kentucky Fried Chicken, you know, Kentucky Fried Chicken's recipe is an important recipe. And they'd obviously, if somebody knew that specific recipe, you wouldn't want somebody going to open another chicken place and using that specific recipe. And of course, with technology, obviously that's really important. And I know you and I, we grew up in Rochester, New York. There was a huge case with Polaroid and Kodak and Polaroid developed instant photography technology. Kodak had co came up with an instant camera that violated some of those patents and whatnot. And I assume maybe you know, it, I dunno if that necessarily is falls under the same category as far as non-disclosure, but I I, I think that some Polaroid people had come to Kodak and that's how they learned about that kind of stuff. So I think a non-disclosure agreement, it, it seems to me that of all the restrictive covenants, this may be the most, I mean the easiest to kind of enforce is that, is that correct or, or not?

Kathleen Jennings (22:21):
Well, it, it should be, again, as long as you are focused on protectable interests, you know it, as long as the information that you're protecting isn't something that's already readily available. And, and you should have your definitions in your agreement that say that it's not readily available in the public's eye. And you, along with the confidentiality covenant, however, the company also needs to make active efforts to keep the information confidential. That means password protect things or, you know, back in the old days, the old locked filing cabinet, but don't make it so accessible that it's, you can't claim that it's actually subject to some type of protection. What we see in these cases, litigation wise you'll see and, and these are the fun ones cuz the ex-employees will normally start emailing things or downloading things a few days before they leave the company. And, and I guess they don't realize that all of that's going to be visible on their work computers cuz they always do it on a work computer. And so when a company has someone go into the work computer and see this data dump, you know, they know something's up. And even if the employee hasn't taken something that's arguably protectable, it just looks bad and, and it's likely to cause some type of nasty Graham followed by some litigation.

Thom Jennings (23:58):
Alright. And as usual, we will close with a tail from Thom, the tales of, whoa, I guess we could probably start calling them.

Kathleen Jennings (24:08):
Thom, you have a restrictive covenant tale

Thom Jennings (24:11):
<Laugh>. I know it's hard to believe,

Kathleen Jennings (24:13):
It is hard to believe in your storied employment history. Do tell us Thom <laugh>,

Thom Jennings (24:20):
This one, I don't know, this one will probably be fairly quick. I was working for a digital services agency and digital services agency, basically websites web, web development, web marketing, you know, all all things related to the internet. And I went, I went to look for another job cuz we were, we were having some issues with, I was having some issues with my employer and, and I, we, we actually had as a group, I think right before I had left, our CEO had given us this agreement that we had to sign, and we all kind of looked over it and we said, you know, is this, is this a non-compete agreement? He said, oh no, this isn't a non-compete. We had to,

Kathleen Jennings (25:04):
I believe you sent it to me, didn't you, Thom?

Thom Jennings (25:06):
I didn't want to say I sent it to you. I didn't, without asking you if I could say that I sent it to you, but I did. I did. You sent it, you Yes, I sent it to you. So I, I happen to have a sister who is a resident expert,

Kathleen Jennings (25:15):
And what did I say?

Thom Jennings (25:16):
And you said, you know, you could sign it, this thing doesn't look like it's very enforceable. And there was, there was definitely some, some things in, so we, you know, we signed it and in fact, my son your your nephew worked there with me as well, and we both signed it and he left and he went into, he went to do something entirely different. He went to be a, an executive recruiter, but then I went to a

Kathleen Jennings (25:39):
Super doing very well, I might ask,

Thom Jennings (25:40):
He is doing well, not that he would ever listen to this podcast, but if he does, I

Kathleen Jennings (25:45):
Know if he does, we'll give him a shout

Thom Jennings (25:47):
Out, we'll give him a shout out. And his, the best thing he's done is, is, you know, make that granddaughter of mine, Michelle Elizabeth Jennings, she likes to say all three of those tapes just turned four. But anyhow, so sign this agreement, I went to get another job and with a, with a smaller agency. And they were, of course, you know, they wanna hire me because I, I had experience in the field and they asked me about the agreement, I gave 'em a copy of it, you know, blah, blah, blah. So I wound up I had a, a call list and if you're in sales, you know, you'll get a list of, of potential clients that have either done, I don't know, maybe, maybe sent an email or an inquiry inquiry or something like that and you'll call and you'll follow up.

Thom Jennings (26:34):
So I had sent off an email to somebody that wasn't my personal client when I had worked for this other company, but they did business with my previous company. And honestly, I didn't even know that at the time. And so my boss calls me and he says, oh, it looks like, you know, you've, you've solicited somebody that, that used to do business with your old employer. And I'm like, well, I I didn't even know that they did it. And I said, and he said, well, we got a letter from them, from their attorneys that said that you violated an agreement that you're soliciting business for them. And I said, well, first off, I wasn't even soliciting them for services that are, my previous employer even offered <laugh>. This was an entirely different thing. And and secondarily again, i i, I mean this wasn't even somebody that I had worked with, so there's no reason that I would even know that they did business with, with our company. And the employer who was, again, he was a small, small shop and he just said, well, we can't afford the potential litigation. And so he let me go,

Kathleen Jennings (27:37):
Wow.

Thom Jennings (27:37):
Yeah, <laugh>,

Kathleen Jennings (27:38):
That's

Thom Jennings (27:39):
Funny. <Laugh> it was cold. But yeah. But in retrospect, I, I guess I don't know. I mean, I I mean the, the, the lesson there is, I mean, I, I didn't think the agreement was crafted really well. I probably could have contested it on some level. I mean, I may have even been able to get some legal recourse against my former employer for putting me in a position where I wasn't able to work in that industry, but

Kathleen Jennings (28:03):
Interference with employment, yeah. Yeah.

Thom Jennings (28:05):
But,

Kathleen Jennings (28:06):
And, and in New York, those types of agreements are very difficult to enforce. Yeah.

Thom Jennings (28:10):
But at the end of the day, you know, I, I didn't I didn't take the, I didn't think it was worth the time, but I don't know. I mean, what's your thoughts in terms of employer A and employer B and, and how they could have potentially handled the situation better? Because I think obviously there's some ethical issues that are raised there. Company A is is, I mean, I've, I know they're not doing well. I mean, they lost a lot of employees and I think that obviously when they do things like that, that are heavy handed, it, it certainly can have ripple effect in terms of morale and, and their ability to recruit new employees. I don't know that company b I think company B is pretty much where they were when I was with them five years ago. So they haven't really expanded either. So what's your thoughts, resident expert?

Kathleen Jennings (29:03):
Well, my thoughts would be that if you are soliciting a client of the former company that you never had material contact with while you were with former company and soliciting them for services that former company didn't even offer, then it wouldn't have been enforceable or they wouldn't have been able to enforce that agreement against you. You weren't acting in violation against it or in violation of it. However, a new company I can see apparently are just litigation averse and or just incredibly cheap and didn't want to fight it. And there's some companies that will, and there's some companies that just don't wanna spend the money. And so yeah. Company A was very heavy handed and got their way that time, even though they shouldn't have.

Thom Jennings (29:57):
Yeah. And, and interesting enough that affor mentioned son of mine, Thom Jr. He went to work for a, a company and in the same sector. This was before we both worked for company A and they tried to do the same thing. They sent a nasty gram, as we like to call it, a letter from an attorney. And the, the other company was big enough to say, eh, you're not gonna, you're not gonna intimidate us. We'll, we'll, right, we'll fight to keep the, the employee. So I guess maybe if you were to give advice to employers since this is a podcast designed for employers that, you know, you kind of have to choose your battles and obviously these agreements should exist in, in some industries, but they have to be crafted. Well, and I just hit the microphone. Did you hear that?

Kathleen Jennings (30:47):
I did.

Thom Jennings (30:48):
Oh goodness. Everyone will stop listening. But anyhow these agreements should be crafted. Well, they you also have to think about the ethical implications and again, the, the potential of having to deal with potential litigation,

Kathleen Jennings (31:04):
Correct? Absolutely, yes. And, and know your state law. Look at your state law. If you have businesses that do business in multiple states, that's gonna create an even bigger issue. Or if you have employees jumping from state to state, you'll also have choice of law issues in these types of agreements. So it's the kind of thing where you really do need to consult with an attorney to draft the agreement. Don't just pull it off the internet and think that that's gonna work. And then also have your attorney on hand. If you hire an employee that has one of these agreements, or you get a nasty gram about one of these agreements, don't try to handle it yourself. You definitely need to have counsel involved in these types of, of problems.

Thom Jennings (31:54):
And ultimately, the best way to avoid these types of conflicts is take care when you're hiring and treat the people that are working for you well so that they don't decide to go to other companies.

Kathleen Jennings (32:06):
Well, that would be one way to definitely cover your assets, Thom.

Thom Jennings (32:10):
Absolutely. Well, with that, fantastic tag on our name, cover your Assets, I will see you. Thanks again, resident Expert and sister Kathleen. And

Kathleen Jennings (32:23):
Always a pleasure favorite brother Thom

Thom Jennings (32:26):
<Laugh>. And as always, please consider running us a review, sharing the podcast with your friends and the, you know, in, in the industry, people that HR people, business owners, anyone that would really get something beneficial from this particular podcast. And of course thank you everyone out there for listening. We will see you next week on Cover Your Assets, the Labor and Employment Law Podcast.

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The Cover Your Assets-The Labor and Employment Law Podcast is produced by Thom Jennings of the Caronia Media Group. For more details, you can contact him at thom@caroniamediagroup.com.

The information provided in this podcast is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to this podcast or any of the e-mail links contained within the site do not create an attorney-client relationship between Kathleen J. Jennings. The opinions expressed at or through this site are the opinions of the individual hosts and guests.