What Are Restrictive Covenants?
Restrictive covenants are contractual provisions that limit what an employee can do during and after their employment. They are designed to protect the employer's legitimate business interests — including trade secrets, client relationships, and competitive advantages — from being exploited by departing employees.
The three main types of restrictive covenants are non-compete clauses, non-solicitation clauses, and confidentiality agreements. Each serves a different purpose and has different enforceability standards.
The Three Types of Restrictive Covenants
Non-Compete Clauses
A non-compete clause restricts an employee from working for a competing business or starting a competing venture for a defined period after leaving the company. Non-competes are the broadest and most controversial type of restrictive covenant.
Key characteristics:
- Duration — Typically 6 to 24 months
- Geographic scope — Limited to specific regions or markets
- Activity scope — Defines what competitive activities are prohibited
- Enforceability — Varies dramatically by state
Non-competes are the most heavily regulated type of restrictive covenant. Several states, including California, have effectively banned them. Others restrict their use to employees above certain income thresholds.
Non-Solicitation Clauses
Non-solicitation clauses prevent departing employees from soliciting the employer's customers or employees. They come in two varieties:
Customer non-solicitation restricts the employee from contacting or doing business with the employer's clients. The most enforceable versions are limited to customers the employee personally worked with during a specified look-back period.
Employee non-solicitation prevents the departing employee from recruiting their former colleagues to join them at a new employer. This protects the employer from losing multiple key employees in a chain reaction following one departure.
Non-solicitation clauses are generally more enforceable than non-competes because they are narrower in scope. They do not prevent the employee from working in their industry — they only prevent specific solicitation activities.
Confidentiality Clauses
Confidentiality clauses (also called non-disclosure agreements or NDAs) prohibit the employee from disclosing or using the employer's confidential information and trade secrets. Unlike non-competes and non-solicitation clauses, confidentiality obligations often survive indefinitely.
Confidentiality clauses protect:
- Trade secrets and proprietary processes
- Client lists and customer data
- Financial information and business plans
- Source code and technical specifications
- Marketing strategies and pricing data
Confidentiality clauses are enforceable in virtually every state, making them the most universally reliable type of restrictive covenant.
If you operate in a state that restricts non-competes, a strong combination of non-solicitation and confidentiality clauses provides meaningful protection. This approach is enforceable in nearly every jurisdiction and protects the specific business interests most at risk when employees depart.
How Courts Evaluate Restrictive Covenants
Reasonableness
The overarching standard for all restrictive covenants is reasonableness. Courts examine whether the restriction is reasonable in terms of duration, geographic scope, and the activities restricted. An unreasonable covenant may be struck down entirely or modified by the court.
Legitimate Business Interest
The employer must demonstrate that the restrictive covenant protects a legitimate business interest. Simply preventing competition is not enough. The employer must show specific interests at stake — trade secrets, client relationships, specialized training, or goodwill.
Consideration
Restrictive covenants require consideration — something of value exchanged for the employee's agreement to the restriction. At the time of hire, the job itself is sufficient consideration. For existing employees, additional consideration such as a raise, bonus, promotion, or continued employment (in some states) may be required.
Hardship on the Employee
Courts balance the employer's interests against the burden the restriction places on the employee. A non-compete that effectively prevents a specialist from working in their field for two years may be struck down as imposing undue hardship, even if the duration and geographic scope appear reasonable.
Public Interest
Courts also consider the public interest. Restrictions that limit consumer access to skilled professionals (such as doctors, attorneys, or specialized service providers) may face heightened scrutiny.
Blue Penciling and Reformation
When a court finds that a restrictive covenant is overly broad, it has two options depending on the jurisdiction:
Blue Penciling
In "blue pencil" states, the court can strike through the unenforceable portions of the covenant and enforce the remainder. However, the court can only delete words — it cannot rewrite the provision.
Reformation
In "reformation" states, the court can modify the covenant to make it reasonable and enforce the revised version. For example, a court might reduce a 3-year non-compete to 12 months.
No Modification
Some states follow a strict approach where an unreasonable covenant is void in its entirety. The court will not attempt to save it through editing or reformation.
Including a severability clause in your employment agreement is essential. This clause allows the enforceable portions of a restrictive covenant to survive even if other portions are struck down. Without it, a single overbroad provision could invalidate the entire restrictive covenant.
State-by-State Overview
Restrictive States
These states significantly limit restrictive covenants:
- California — Bans non-competes; enforces confidentiality and narrow non-solicitation
- North Dakota — Generally prohibits non-competes
- Oklahoma — Prohibits non-competes with limited exceptions
- Colorado — Restricts non-competes to high earners and requires notice
Moderate States
These states enforce restrictive covenants but with significant limitations:
- Massachusetts — Limits non-competes to 12 months, requires garden leave pay
- Washington — Requires minimum income thresholds, limits duration to 18 months
- Illinois — Bans non-competes below certain salary thresholds
- Oregon — Limits non-competes to 12 months with income thresholds
Enforcement-Friendly States
These states generally enforce reasonable restrictive covenants:
- Florida — Statute specifically authorizes restrictive covenants; courts apply a reasonableness standard
- Texas — Enforces reasonable covenants tied to enforceable agreements
- Georgia — Enforces reasonable restrictive covenants
Best Practices for Drafting Restrictive Covenants
- Tailor restrictions to each employee — A senior VP with access to strategic plans needs different restrictions than an entry-level employee
- Use all three types — Layer non-compete, non-solicitation, and confidentiality provisions for maximum protection
- Keep restrictions reasonable — Shorter durations, narrower scopes, and specific activity restrictions are more enforceable
- Provide adequate consideration — Especially for existing employees being asked to sign new covenants
- Include a severability clause — Protect enforceable provisions from being invalidated by overbroad ones
- Comply with state law — Verify enforceability in every state where you have employees
- Enforce consistently — Selective enforcement undermines the credibility and enforceability of your covenants
- Document the business interest — Be able to articulate the specific interest each covenant protects
Restrictive covenants are among the most powerful tools for protecting your business when employees depart. By understanding the different types, their enforceability requirements, and the state-specific landscape, you can draft provisions that are both effective and legally sound.