Higher Level of Scrutiny Directed at Restrictive Covenants


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Restrictive covenants in sales, purchases and running of businesses are being scrutinized with more attention to how employees are affected and what restrictions are needed by the courts with the employers. Some covenants cause changes to the operations in a company, and these could harm employees when non-competition and nondisclosure covenants are used inappropriately.

Restrictive covenants in a business may lead to employees saddled with unreasonable limitations even after they’ve been removed from the company in one manner or another. Some non-compete contracts require these former workers to stay away from business clients for years after they have had no contact or interactions with the company. Even if the new business entity these employees become a part of or create deals with these clients, they are not permitted to complete transactions or do business with them until the contract ends. This could lead to detrimental effects to these persons. If the courts relieve these contracts, it could lead to lesser conditions with fewer years attached.

Nondisclosure and other covenants that restrict employees in these regards are often seen as too limiting to employees and persons that have left the company after so much time. If the information is common knowledge or the processes would not affect the ability for the company to function or acquire revenue, these covenants may place restrictions that are unwarranted on workers. Some limitations may affect pay, promotion and benefits. Additionally, some states do not permit the companies to place unfair conditions in these documents or to have too many years attached. However, this is different with various states or locations around the country.

What is a Restrictive Covenant?

When a restrictive covenant is used in business terms, this may apply some form of contract, agreement or binding on employees for certain actions. These are legally imposed, but the other party agrees or consents through a signature in the contract. While the covenant itself permits the employee to continue working or increase what he or she has access to, the restrictions lead to limitations in what may be performed or accomplished after leaving the company or when the need to disclose information is denied. A nondisclosure would cause a worker to refrain from providing any details to anyone not already in the know. Then, he or she is legally bound to remain silent even if laws are broken.

A restrictive covenant often causes the employee to become limited outside of the company. When needing more information about processes or someone to talk to about what occurs at work, he or she is not legally permitted to do so with others. Non-compete contract similar affect the employee, but this removes the ability to work with clients or other companies that are supplying revenue to the business. Any redirection of income from these clients would violate these contracts, and then the employee may find himself or herself in court.

Scrutiny on Restrictive Covenants

Because covenants may restrict employees from standard disclosures, competing with the company for several years and other actions, there is a higher level of scrutiny based on certain features of these contracts. If a company has implemented a nondisclosure agreement for the entire business with all employees to sign if they want to stay with the company, this could lead to sanctions by the local government or law enforcement agencies. New laws may be created to stop these practices. This also places whistleblowers in vicarious positions with legally bound contracts keeping them silent in certain matters.

National attention has been directed at these companies based on how severe the restrictions are. Some believe the limitations are too extreme when low level employees cannot possibly use the non-compete contract stipulations to even attempt to gather clients to compete against the company. Because of the scrutiny, some lawmakers are issuing new laws that stop companies from dispersing these contracts to every employee or any employee based on certain factors. It is important to know what state laws have been implemented in these regards to avoid violations to regulations. This will ensure that the owners of these companies are not in direct opposition of the law.

Legal Support in Restrictive Covenants

If a company owner has issued a non-compete or nondisclosure agreement, he or she may be scrutinized and harassed by local government officials. It is important to hire ore contact a retained lawyer to assist with these situations. As long as no laws have been broken, the company owner may be within his or her rights.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

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