You Can’t Work Here, or There, or Anywhere
Every company wants to protect itself from competition by former employees, but how do you know when a restriction goes too far? It’s only natural to want to ensure that former employees don’t use their knowledge and experience gained from your business to poach customers, clients, or other employees. However, you risk running into trouble when the language you use for restrictive covenants (or noncompete agreements) is too broad. This is an ever-changing area of the law, and the best way to avoid crossing the line is to focus on which types of activities need to be restricted to protect the business.
What Kind of Competition Are You Restricting?
We recently told you about a court of appeals case in which the court threw out restrictive covenants that were too broad and lacked reasonable restrictions. Now, we want to go a little deeper and explain what you should keep in mind when drafting or reviewing your own restrictive covenants.
The goal of a restrictive covenant is, or at least should be, to protect the employer from unfair competition by current and former employees. If properly written, the restrictive covenant will clearly identify which activities are prohibited.
Wisconsin generally favors the free movement of labor, so when an employee leaves, there’s a presumption that she can pursue any job opportunity available. However, state statutes allow for restrictions on an employee’s or former employee’s actions “within a specified territory and during a specified time,” but “only if the restrictions imposed are reasonably necessary for the protection of the employer.” As a result of this public policy, when analyzing a restrictive covenant, courts look at the following factors to determine whether they are reasonable:
- Is the restriction necessary for the protection of the employer?
- Is it limited to a reasonable time period?
- Is it reasonable geographically?
- Is it harsh or oppressive?
- Is it contrary to public policy?
The important thing to keep in mind with these factors is that restrictive covenants only prohibit activity that is reasonably necessary to protect the business. This means that you can’t use a noncompete to protect you from run-of-the-mill competition. Instead, the focus should be on the types of knowledge, information, or experience that an employee has gained that would give her an unfair advantage in competition. That’s why most restrictive covenants are aimed at protecting customer or client lists and confidential business information.
Beware One-Size-Fits-All Restrictions
Some employers draft restrictive covenants to discourage former employees from competing with them at all. Although this is a natural—and legitimate—goal for restrictive covenants, it can often lead to trouble. The problem comes when an employer focuses on the deterrent effect and ends up with a restriction that is too broad or harsh. This often occurs when the noncompete uses form language that doesn’t take into account the nature of the business—or of the employee’s work—and instead makes it difficult to determine what kind of activities aren’t permitted.
The burden is on you to show why a restriction is reasonable or necessary. A restriction that applies across the board without regard for the employee’s role at the company is going to face serious problems.
To avoid these pitfalls, the first step in drafting restrictive covenants is to keep in mind the nature of the business and the type of work the employee does. Different types of employees are going to have different knowledge, experience, and levels of access to company information. It’s important that your restrictive covenants take into account these differences.
Depending on the size of your company and the various duties of employees, it may be a good idea to have different restrictive covenants for different job descriptions. Is your company a manufacturing company, or are you in a service industry? Does your company depend on building a specific customer or client base? What kind of interactions do your employees have with customers? By asking some basic questions, you can begin to determine what kind of restrictions would be reasonable for your company.
Confidential Business Information Must be Treated as Such
Even if an employee doesn’t have direct interaction with customers or clients, she can still be subject to restrictive covenants regarding confidential business information. Every company is going to have at least some confidential information that it wants to protect, whether it’s customer information, a specific process that it considers unique, or any number of other things that it uses to gain a competitive advantage. Many employees will have access to this kind of information, and it’s important to protect it.
The danger for employers is when they go too far in trying to define confidential business information and end up including virtually anything. A key factor is whether you actually treat the information as confidential and whether it’s generally known in your industry. Another point to keep in mind is the common misconception that confidential business information and trade secrets are interchangeable. Trade secrets are specifically defined in state statute and have special protection. Confidential business information is a broader term that may include trade secrets.
Restrictive covenants are important tools to protect your company from unfair competition, but you need to be careful. Keep in mind that the goal is to protect your legitimate interests, not discourage a former employee from ever working for a potential competitor. To help ensure your restrictive covenants are reasonable, have an attorney with experience in this area of the law regularly review them to make sure they comply with the law.
This article, slightly modified to note recent updates, was featured in the November 2017 issue of the Wisconsin Employment Law Letter, which is co-edited by Axley Brynelson Attorneys Saul Glazer and Michael Modl and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.