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Ballast Advisors

Restrictive Covenants in Employment and Related Contracts

From “Golden Handcuffs” to a Golden Handshake

 It’s common for businesses to court talented executives with a variety of perks, including signing bonuses, stock options, and nonqualified deferred compensation plans to supplement regular pensions and retirement savings. While it may be understandable that companies would like to “lock-in” valuable executives with “one-way” employment agreements (sometimes referred to as “golden handcuffs”), many top performers recognize that they may no longer be immune to corporate restructuring in a challenging economic climate. Consequently, key employees may be concerned that restrictive employment agreements may limit their future career mobility. 

Types of Restrictive Covenants 

Perhaps the most common restriction is a noncompete clause, which typically bars an employee from going to work for a competitor for up to two years, depending on the particular agreement. A noncompete clause is generally valid whether an employee leaves voluntarily, a job is eliminated, or an employee is fired. 

A nondisclosure clause is typically intended to prohibit employees from divulging proprietary information (including trade secrets) to outsiders during their employment. However, some employers may tie a nondisclosure clause to a noncompete clause to protect sensitive company information for a period of time after a key employee leaves. For example, one could assume that, after one year, any marketing plan would be less useful to a competitor. But, in some situations, an employer might attempt to impose nondisclosure of client lists or a product development strategy for a longer period of time. 

A third type of restrictive covenant is a nonsolicitation clause. This restriction prevents a former employee from recruiting employees or clients away from a previous employer for a period of time, generally one to two years. 

Other less frequently used restrictions include a payback clause, which requires an employee to reimburse an employer for costs incurred by the employer to recruit and relocate the employee should he or she leave within a set period of time, and a matching clause, which ties an employee to his or her current employer if the employer decides to match an outside offer to recruit the employee.