Restrictive Covenants in Employment Contracts

A recent Ohio case brought to mind the ever changing status of covenants not to compete. The case, Murray v. Accounting Center & Tax Services, Inc., while not the most controversial or ground breaking case, does evoke thought regarding the tentative nature of covenants not to compete in employment contracts.

Murray v. Accounting Center & Tax Services, Inc.

The case involves an accountant who was employed by the bookkeeping service. She had signed a covenant not to compete for a period of two years after her termination. Other facts pertinent to the case were that: 1) She was a bookkeeper and had a private practice providing tax return services prior to her employment, and 2) the agreement was signed AFTER she was employed.

Consideration

Historically, Ohio courts were resolute that any covenant not to compete had to include additional consideration (usually an increase in pay or bonus) if the covenant was entered into after employment began. If an employer demanded an employee sign such an agreement after their employment began and additional monies or other consideration was not paid, the covenant was unenforceable.

In the last few years this principle has eroded and several courts in Ohio have abandoned this theory of law. The Eighth Appellate District (Cuyahoga County) has completely reversed this historical precedent by stating that continued employment is sufficient consideration for such a covenant. Many other courts have follows this ruling and, today, the courts of Ohio are split regarding this issue. The Ohio Supreme Court has yet to rule on this legal conflict.

Modification by Court Order

The other issue this case presents is the power of the court to limit the restrictions of such covenants. Typically, restrictive covenants set forth limitations as to time and distance. Such restrictions are characterized by such terms as ..”for a period of two years and 500 miles.” This meant the employee could not work in the same field for two years within 500 miles of the employer’s address.

Once again, historically, the courts are allowed to reduce these limitations if they are too restrictive. In the Murphy case, the court stated,

“ A covenant restraining an employee from competing with his former employer upon termination of employment is reasonable if the restraint is no greater than is required for the protection of the employer, does not impose undue hardship on the employee and is not injurious to the public.”

If the covenant not to compete is unreasonable, courts are empowered to modify the terms of the covenant to create reasonable constraints. Some the factors taken into consideration are:

1. Absence or presence of limitations as to time and space.

2. Whether the employee represents the sole contact with the customer.

3. Whether the employee is possessed of confidential information or trade secrets.

4. Whether the covenant seeks to eliminate competition which would be unfair to the employer or merely seeks to eliminate ordinary competition.

5. Whether the covenant seeks to stifle the inherent skill and experience of the employee.

6. Whether the benefit to the employer is disproportionate to the detriment of the employee.

7. Whether the covenant operates as a bar to the employee’s sole means of support.

8. Whether the employee’s talent was developed during the employee’s term of employment.

9. Whether the forbidden employment is merely incidental to the main employment.

For example, lets assume the covenant read,...”shall not be employed as an accountant for a period of two years within 500 miles...” This covenant would obviously be subject to modification. It bars the employee from obtaining any employment in their chosen profession. The benefit to the employer far outweighs the detriment to the employee and, finally, it operates to bar the employee’s sole means of support.

Now, let’s modify the covenant to read, “...shall not be employed as an accountant for a bookkeeping service to widget manufacturers for a period of two years within 50 miles...” The difference is obvious. The covenant does not totally restrict the employee from obtaining employment in their profession and the restriction appears only to protect the vertical market serviced by the employer. In this instance the court might maintain the covenant as is.

Conclusion

Nonetheless, the employer should be mindful of the fluidity of these type of restrictions. They should be aware of where they are located and determine whether the court in their jurisdiction will enforce the covenant and/or modify it. It requires the employer to be somewhat creative in the way the covenant is written. Most importantly it requires the employer to be aware that courts, generally, will side with the employee when the court feels the employer is treating its employee unfairly.