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Understanding restrictive covenants when starting a new firm

On Behalf of | Dec 4, 2023 | Employment Matters |

Restrictive covenants are legally binding clauses typically found in employment contracts. They are created to protect a company’s interests by restricting certain activities of an employee, especially after they leave the company. 

These clauses become particularly crucial when you’re considering starting your own firm after working for another company in a similar industry.

Types of Restrictive Covenants

There are several types of restrictive covenants, each designed to address different concerns:

  • Non-compete agreements: These prevent former employees from starting or working for a competing business within a specified geographic area and time frame.
  • Non-solicitation agreements: These restrict ex-employees from soliciting clients, customers or other employees of their former employer.
  • Confidentiality agreements: Often extended beyond the term of employment, these agreements prohibit sharing confidential or proprietary information.

Legal Implications and Enforceability

The enforceability of restrictive covenants varies by state and is often subject to legal scrutiny. Courts typically consider factors such as:

  • Reasonableness: The restrictions should be reasonable in terms of duration, geographic scope, and the nature of the limitations.
  • Protection of legitimate business interests: There must be a legitimate interest (like protecting trade secrets) that the employer is trying to protect.
  • Public policy: The covenant should not be against the public interest, such as restricting employment opportunities unduly.

Strategies for Managing Restrictive Covenants

When planning to start your firm, consider the following strategies:

  • Review existing agreements: Understand the terms of any covenants you are subject to and their potential impact on your plans.
  • Plan accordingly: Depending on the restrictions, you may need to adjust your business plan, location or target market to comply with the covenants.

Understanding restrictive covenants is essential for anyone looking to start their firm after leaving employment. Careful planning and legal guidance can help ensure your new venture complies with these agreements while pursuing your entrepreneurial goals.