TIPS FOR DRAFTING A RESTRICTIVE COVENANT IN AN EMPLOYMENT AGREEMENT
In order for an employer to protect their confidential business information, including client contacts, it is often advisable for an employer to require employees to enter into an employment agreement containing a restrictive covenant. Such an agreement should be presented to the employee by the employer at the beginning of the employment relationship. However, in order for the restrictive covenant to be enforceable the employer must be certain that the terms of the restrictive covenant are reasonable. That is, the employment agreement must be specifically drafted to be reasonable in accordance with established New Jersey law.
First, There Must Be Adequate Consideration
First, in order for a restrictive covenant to be enforceable there must be sufficient consideration for the employee to enter into the agreement. Simply, the employee must be getting something in return for entering into the employment agreement. New Jersey courts have held that continued employment is sufficient consideration for an employee to enter into an employment agreement with an employer. That means, that as long as the employer promises to employ the employee after the agreement is executed, for a reasonable time, the test for adequate consideration will be deemed satisfied and the Court will continue to the next step to determine the validity of the employment agreement.
Second, the Covenant Must Be No More Restrictive Than Is Necessary
Second, the covenant must be no more restrictive than is necessary to protect legitimate business interests. Simply, the employer's interests must rise to the level of a proprietary interest deserving of judicial protection. That means that the restrictive covenant must do more that merely attempt to stifle competition. New Jersey law has determined that an employer has a protectable interest in its trade secrets and other knowledge that the employee gains exclusively through the contractual employment relationship. Thus, the agreement must seek to protect customer relationships, trade secrets and other confidential information. The agreement cannot simply seek to prevent an employee from competing with the employer after the employee’s employment terminates.
Third, the Covenant Must Impose No Undue Hardship on the Restricted Party
Third, the restrictive covenant must impose no undue hardship on the employee. Hardship is determined by a weighing of the burden placed on the employee by the restrictive covenant. Therefore the restrictive covenant cannot be for a period of time beyond that which an employer needs to protect its customer base. Further, the covenant should not extend beyond the territorial area needed to protect the interests of the employer.
Fourth, the Covenant Must Not Be Injurious to the Public Interest
Fourth, the restrictive covenant must not be injurious to the public interest. This requirement considers what if any injury the public would suffer if the restrictive covenant is enforced. Generally, restrictive covenants have been considered injurious to the public interest where the restrictive covenant is contained in a medical practice agreement. In such matters the injury to the public results from the public’s lack of ability to continue to obtain medical services from their physician in a reasonable manner or where the restriction would create a shortage of physicians in the area.
In sum, when drafting an employment agreement, the employer must consider the following requirements:
1. There must be sufficient consideration for the employee to enter into the agreement.
2. The covenant must be no more restrictive than is necessary to protect legitimate business interest.
3. The restrictive covenant must impose no undue hardship on the employee.
4. The restrictive covenant must not be injurious to the public interest.
If you have any questions regarding any contract matter, including employment agreements and restrictive covenants, the experienced attorneys of Hill Wallack LLP are ready to assist you.