Understanding Restrictive Covenants
The financial services sector is witnessing significant changes in how restrictive covenants, such as non-compete and non-solicitation provisions, are applied and enforced. These shifts, driven by the COVID-induced movement of talent and recent legislation, demand close attention from professionals subject to such agreements. This is true whether your employment agreement is subject to FINRA arbitration or judicial review in a court.
The Shift Away from Non-Competes
Non-compete clauses, once the standard, are losing ground. The financial industry has witnessed some of these changes with The Protocol, which are rules that some financial services companies agreed to follow when an employee leaves one company for another. Now, legal and societal trends favor less restrictive non-solicitation clauses over non-compete clauses, which allows a former employee to work for competitors so long as clients, customers, or employees are not solicited to leave the former employer. This is similar to The Protocol rules. These changes align with a broader recognition of the need to balance business protection with individuals’ right to work.
Focus on Non-Solicitation and Confidentiality
Non-solicitation and confidentiality agreements are gaining prominence. These provisions, viewed as less restrictive, play a significant role in protecting businesses and their legitimate interests (including confidential information) without unduly limiting employees' career opportunities or ability to provide for their families.
Legal Landscape: An Employee Perspective
Recent legislative actions in various states and at the federal level, including executive orders, reflect a shift towards limiting the scope of restrictive covenants, particularly for low-wage workers, which are typically not enforceable anyway but some employer’s ignorantly or willfully abuse and misuse restrictive covenants. This evolving environment offers hope for employees seeking greater career mobility.
Strategies for Employees
The enforceability of restrictive covenants often depends on their specificity. The BDO Seidman test (named from the leading New York case addressing restrictive covenants, including non-compete agreements) assesses the legitimacy of the employer's interest, the impact on the employee, and public interest, providing a framework for evaluating these provisions. It is always a fact-based and unique to each situation analysis.
Tactics for Navigating Restrictive Covenants
The best defense is to avoid restrictive covenants or modify their terms when you first negotiate your employment. In any event, when an Employee is planning to transition employment, then he or she should examine any covenant for its validity, including overbreadth or vagueness. Engaging in early discussions to understand and negotiate the terms of these agreements is crucial. Being informed about the applicable laws empowers employees to secure fair and reasonable conditions.
Overcoming Restrictive Covenants
Several legal defenses can render restrictive covenants invalid or otherwise unenforceable, such as proving the covenant's excessive breadth in scope, duration, or geography. Employees can also challenge covenants if the employer breaches the contract or seeks to restrict professional relationships pre-existing the employment. These defenses can weaken the enforceability of restrictive covenants, providing employees with leverage.
Conclusion
The narrative on restrictive covenants in financial services is increasingly aligning with employee interests. As legal standards evolve, opportunities arise for professionals to advocate for their career freedom. Staying informed and proactive enables employees to navigate these legal provisions effectively, ensuring their career paths remain as open as possible.
For professionals in financial services, understanding and strategically navigating restrictive covenants is crucial for career advancement. Knowledge and careful planning can transform these legal obligations from barriers into manageable aspects of your professional development.
If you are facing concerns related to a similar issue or if you have questions about your Employment Law situation, please feel free to contact us here. We have many years of experience handling such matters and will be able to assist you in resolving the dispute.
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