Changes in Law Governing Employment Contracts

December 16, 2010 by · Leave a Comment 

Background

Non-compete contracts are on the mind of employers and employees alike recently with the passage of a constitutional amendment that dictates a new framework for enforceable restrictive covenants in Georgia.  What does this mean for employers and employees? Georgia law, previously only established through court decisions and not under valid Georgia statutes, was restrictive toward the enforcement of non-competition and other restrictive covenants in employment agreements.  For example, if a prior restrictive covenant in an employment contract was considered too broad by time, territory, or activity, the entire restrictive covenant would be thrown out and the court would not be able to blue-pencil or modify the covenant in order to make it more reasonable.  In addition, if either the non-compete or non-solicitation clause was found to be invalid, the other non-compete or non-solicitation clause in the same employment contract would also be invalid. 

With the passage of the new constitutional amendment, courts will now be permitted to modify restrictive covenants in an employment contract entered into on or after January 1, 2011, so as to make them enforceable rather than invalidate an entire provision that is deemed too broad.  The new statute specifically applies to employment contracts between employers and three types of employees:  1) executive employees; 2) research and development personnel and persons in possession of important confidential company information; and 3) persons in possession of selective or specialized skills, learning or abilities, customer contacts and information, or confidential information if such skills, learning, abilities, contacts or information were obtained by working for his or her employer.

Types of Restrictive Covenants in Employment Contracts

Non-Compete Covenant

Under prior law, a non-compete agreement would be enforceable only if its restrictions involved nothing more than was reasonably necessary to protect an employer’s legitimate business interests, and if the agreement reasonably and specifically defined limitations with respect to duration, activity, and territory.  Under this type of provision, the employee could agree that for a certain duration after his or her employment ended, such employee would refrain from conducting an activity that was competitive with the activities engaged in by the employee for the employer within the geographic territory or areas where the employee conducted such activities. 

Since courts previously did not have the power to modify these provisions, if any of them were deemed to be too broad, then the entire provision would be invalid.  For example, if an employee worked for an Atlanta, Georgia company doing business only in Georgia, he or she could not be restricted from carrying on a similar business in Tucson, Arizona since the employer did not conduct activities in Arizona.  This type of restriction would be considered too broad and the entire non-compete provision would be invalid regardless of the duration and activity.

Under the new law, however, the court can modify the provision so that it is not overly broad and, in turn, validate the entire provision rather than throwing it out.  A good example of what will now be allowable under the new law is a springing territorial provision.  A number of non-compete agreements restrict sales associates from competing within the sales territory assigned to them within the last 12 months of their employment.  Since this specific geographic territory could not be determined until the time the employee left the firm, it was not specific at the time the contract was signed and, therefore, was unenforceable under prior law.  Under the new law, this type of specificity is not required and these springing territorial provisions will be upheld as valid non-compete agreements.

Non-Solicitation Covenant

A non-solicitation provision differs from a non-compete provision in that it restricts employees from soliciting customers or clients of their prior employer rather than restricting the activities or territory in which the employee can conduct business.  Also, unlike non-compete clauses, it is not necessary to place a geographic limitation on the covenant if it is limited to those customers or clients which were being serviced by the employee. 

Previously, employers including both non-compete and non-solicitation covenants in their employment contracts risked having no protection for the reason that if one of the covenants failed, then both were deemed to be invalid.  Under the new statute, since courts now have the discretion to modify the covenants, they can be modified to be reasonable.  In addition, a non-solicitation covenant will not be voided merely because an invalid non competition covenant is contained in the same employment agreement.

Confidentiality Covenant

The third type of restrictive covenant found in most employment contracts is the confidentiality or non-disclosure covenant.  This differs from the non-solicitation provision in that rather than preventing the solicitation of customers, it prevents the sharing or usage of confidential information at the employee’s new place of employment.  Some types of confidential information include customer lists, marketing techniques, and trade secrets.

Under prior Georgia law, if such a covenant did not contain a reasonable time limit during which such information must remain confidential, it would be deemed invalid.  With the change in law, however, the time restraint requirement is now eliminated and businesses are permitted to protect the confidentiality of their information for as long as there is a reasonable business need to keep such information confidential.

Considerations

Prior to the recent changes to Georgia law governing employment contracts, it was exceedingly difficult for an employer to draft restrictive covenants that adhered to all of the requirements dictated under case law.  The failure to comply with even a minor requirement could cause the entire covenant to be voided, leaving the employer with no contractual protection for legitimate business interests.

The new Georgia statute certainly relieves the burden on employers when drafting employment contracts, but it does not give them a free-for-all to enforce outlandish restrictive covenants on former employees.  The statute establishes parameters from which employers can draw and grants courts the authority to modify any overbroad covenants in order to limit them to what is reasonably necessary to protect the employer’s business interests. 

All employment contracts entered into on or after January 1, 2011 will be viewed in the fresh light created under the new amendment.  Conversely, employment contracts already in effect will continue to be viewed in light of the much more restrictive existing case law.  In that regard, it would be advisable for employers to enter new employment agreements with all of its employees beginning in 2011, so as to ensure that such agreements will be interpreted and enforced in accordance with the new law.

avatarAbout Morgan R. Luddeke
Ms. Luddeke currently assists individuals with their estate planning and probate needs, including advice on the use of wills, trusts and family partnerships, planning for retirement, and estate tax and administration issues. Full Bio.