Is It Too Late To Implement Restrictive Covenants For My Current Employees?

The Great Resignation, the Big Quit and the Great Reshuffle have become normal parlance as employers struggle with employee turnover, which has become an issue that must be addressed by management, HR and professionals at the highest echelons of company leadership given the big picture challenges in today’s landscape. Departing employees can significantly impact a business’ operations, which can run the gamut from the loss of institutional knowledge and skills to the consequences from more sinister employee behavior, such as taking confidential information, convincing other employees to leave, soliciting clients, vendors and contractors and disparaging the company online and to others.

Many employers protect their business and assets through employee restrictive covenant agreements, which can include non-competes (employee cannot compete usually in a geographic region for a specific time period), non-solicitation of customers, non-disclosure of confidential information and non-poaching agreements of employees. But some employers do not. And, for those employers that do not and are navigating turnover in this ultra-competitive employment market, what legal options do they have to best protect their assets from departing employees?

Requiring Restrictive Covenant Agreements

First, employers should consider requiring current employees to sign restrictive covenants. While state law varies, generally employers are not prohibited from requiring that current, at-will employees sign restrictive covenant agreements. So, absent a specific state prohibition, if you are an employer without restrictive covenants, you can make a business decision that certain employees must sign restrictive covenants.

Importantly, however, a restrictive covenant must be supported by valid consideration, meaning an employee must receive something of value in exchange for entering into the restrictive covenant. While what constitutes sufficient consideration is state-specific and beyond the scope of this article, in many jurisdictions, courts consider continued at-will employment as sufficient consideration. But in other states, continued employment is not sufficient consideration for a restrictive covenant, or the law is not clear, and additional consideration (increased pay, bonus, or change in title and responsibilities, etc.) would likely be required as consideration.

Employee Refusals to Sign Restrictive Covenant

Second, an employer who requires restrictive covenants for current employees must consider what happens if those employees refuse. On one extreme, an employer can condition continued employment on the signing of an agreement. Generally, an at-will employee does not have a cause of action if that employee’s employment is terminated for refusing to sign a valid, lawful restrictive covenants agreement. Of course, other options exist.

An employer could negotiate with the employee and limit the scope of restrictive covenants (time and geography) or eliminate certain clauses all together. Or an employer could incentivize the employee to accept the agreement through higher pay or other benefits. Conversely, an employer can limit the employee’s access to confidential or customer information, or other perks of employment (telework, etc.), until such an agreement is reached.

Alternative Protections

Third, if an agreement cannot be reached, all is not lost. There are state laws and a federal law (Defense of Trade Secrets Act) that protect the use and disclosure of trade secrets, and employees generally cannot violate trade secret laws, whether they have a restrictive covenants agreement or not. While what is a trade secret is very fact specific, an employer can best protect itself by documenting what it considers trade secrets and informing the employee of such. For example, an employer should, at the very least, clearly define and specify the material it considers trade secrets, take appropriate steps to protect the information and inform the employee about the company’s rules regarding use and disclosure of such information.

There are also other potential protections. Most states impose common law duties of loyalty on employees. This means an employee has a duty not to act or to agree to act during the period of his employment for persons whose interests’ conflict with those of the employer in matters for which the employee is employed. This duty of loyalty has been interpreted to restrict current employers from diverting business to, using time and resources for and sharing confidential information with a competing entity. There are also potential protections against employees who knowingly cause or induce someone to breach a contract (e.g., employing someone in breach of restrictive covenants) and for tortious interference with business relationships.

While these theories will be very fact and state law specific, the important part is to remember that all is not lost simply because an employee does not have a restrictive covenants agreement.

In sum, the Great Resignation is very real. Employers who are not protected with employee restrictive covenants should strongly consider doing so, and consider all other options to defend important business assets and protectable interests.