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What Happens If You Break a Restrictive Covenant in Your Employment Contract?

Employment contracts will often have what are called “restrictive covenants” included in them. Essentially, a restrictive covenant is a clause, or it can be contained in an agreement in and of itself, whereas a person or entity is restricted from engaging in certain actions and activities. For instance, a restrictive covenant may limit an employee’s ability to go and work for a competitor after the employment relationship has ended. You might be curious as to what can happen should a person break a restrictive covenant in an employment contract. What are the potential consequences? We will discuss more on that here.

What Happens If You Break a Restrictive Covenant in Your Employment Contract?

When properly used, a restrictive covenant is an effective way of preventing unfair competition when companies are in the same competitive market and this is accomplished without placing an undue burden on an employee subject to the restrictions. Some restrictive covenants seek to protect company secrets from the public and competitors. Other times, restrictive covenants are used to protect the poaching of company clients. It is important to first consider the possibility that a restrictive covenant may be found unenforceable as it may be found as patently unfair or overly restrictive.

Restrictive covenants are themselves restricted as they must be limited to be enforceable and effective. If a restrictive covenant is found overly broad in scope and, thus, placing an undue restriction on an employee, then it will likely be deemed unenforceable. In such cases, a case in which a former employee brings an action for breach of that restrictive covenant may be thrown out entirely. In the alternative, a valid restrictive covenant that has been breached can have serious consequences.

In the event that an employee subject to a valid restrictive covenant breaks the terms of the restrictive covenant, it is said that the employee has breached the agreement. A breach of a restrictive covenant can lead to a lawsuit with the employee’s former company litigating against him or her. As previously stated, a restrictive covenant that is found to be in violation of fair competition laws will likely fail and the lawsuit will be thrown out. In the alternative, however, with a valid restrictive covenant that has been violated, a court may go on to award the injured party damages.

Damages can be quite difficult to calculate in breach of restrictive covenant actions. That is why it is quite common for employers to include a liquidated damages clause in whatever agreement held the restrictive covenant itself. This gives employers a great advantage as, in the event of a breach, they know how much in damages they would be entitled to. This gives the employer certainty of damages in cases where damages can be difficult to quantify. The amount of liquidated damages represents an estimate made by the parties at the time the agreement was entered into of the extent of the injury the party would sustain in the event of a breach. It should be noted, however, that use and enforcement of a liquidated damages clause will prevent an employer from seeking actual damages. Additionally, or alternatively, a court may also order injunctive relief ordering the employee or former employee to cease engagement in the activity violating the restrictive covenant.

New Jersey Employment Law Attorneys

Do you have questions about your employment agreement? Are you uncertain about a restrictive covenant and its potential consequences? Do not hesitate to reach out to the dedicated team of employment law attorneys at Castronovo & McKinney. Contact us today.