Synopsis: Covenants are part of any contract including employment contract. They are aimed to safeguard the strategic assets of the organization. Though covenants are common in employment contracts, only a fraction of companies are able to enforce them or initiate legal action in case of a breach. This article speaks about types of covenants in employment contract and what measures could companies take so that they could enforce.

Recently I came across a client who was insisting on a bond to be signed by new joinees which required them to serve for min 3 years from joining else pay six months salary. This too came as a surprise to the candidates and me. Several candidates backed off and hiring was made more difficult. This made me think about the usefulness of these covenants in employee contracts. Would like to address the issues as to how to manage them and make use of them in a most constructive manner.

What are covenants

Covenants are written promises between two parties that requires them to adhere to some commitments . They are widely used not only in employee contracts but also in financial industry, Mergers, acquisitions etc. Focus of this article would be on the covenants in employee contracts. These covenants are of two types. They are.

• Affirmative covenants – They require the employee to do something and mostly apply to the period they are in service with the company. An example is requiring the employee to serve the organization for a minimum period and pay a sum in case of breach
• Negative or Restrictive covenants – They are just the opposite of affirmative covenants where they require the employee not to do something. They may apply during the period of employment or for specific duration even after the employment. Example is a non-compete agreement

One of the primary objectives of these covenants is to safeguard the business interest of the organization and larger interests of the stake holders (including employees). For instance, every organization invests lot of time and resources in hiring, training and developing employees and for them to achieve a reasonable return on investment, the employee may need to work for a minimum duration. Every organization has key trade secrets, information like clients list, pricing which could cause significant disruption if it is leaked to a competitor. There can be little doubt that these covenants are indeed required. Question is are they serving the purpose? Are they being utilized to fullest? Are there some other ways that could help organizations manage risks?

What is the Problem?

I am not a lawyer and am not planning to go in depth into of legality of these covenants. In my experience I have found issues in two areas;

•  The content. How is it worded. Is it reasonable so that it serves the purpose?
•  The Intent. Is it implemented in letter and spirit?

On the content, several organizations believe that if they make it more stringent, the safer they are. But the biggest test for any covenant is it must be fair and reasonable. It should not be curtailing the constitutional freedom of the employee. For instance, in the above cited example of a retention clause of 3 years else 6 months’ salary to be paid by the employee, would the organization be able to substantiate that indeed they invested so much on this employee on his/her development? What is the rationale for a 3-year period? Similarly, some organizations bar employees from taking up any job with competitors upto 5 years from the date of leaving their current employment. Is this not curtailing the right of the employee to pursue any legal profession of his/her choice? The issue with writing this type of contract is it makes it impossible to enforce. Once you are unable to enforce it becomes just a piece of paper.

Coming to the intent, it is an irony that organizations having a strong non-compete agreements tend to hire talents from their competitors who too have similar non-compete covenants. Does it mean these rules apply only to those employees who choose to pursue their career elsewhere? If an employee who is leaving is barred from taking up any position with any other organization in the same industry for a specified period, are there provisions for adequate compensation for the employee so that they could sustain their livelihood. On several occasions, organizations go after an ex-employee citing confidentiality agreement simply to cause embarrassment to them. They need to carefully define what type of information is confidential. Often, we fail to recognize that most of these so-called confidential data is already available to others just like how we get “market intelligence ” about other organizations. When a senior leader leaves an organization, it is not uncommon to see his team too joining the newer organization with him and they create an alumni group. All these actions spell out our intentions on how we approach these covenants that makes them just another sheet of signed document.

What could we do?

Based on my experience, I would suggest few measures that could make these covenants enforceable.

• Make them fair and reasonable. Don’t be too harsh or unrealistic
• Train and communicate – Please take time to train your employees on these covenants and preferably with relevant examples. When there is a revision, they should be informed in advance and their consent obtained. Consider periodic re training to help in retention
• Set example – The senior management team has the responsibility of leading by example. If you insist on non-compete, non-solicitation please hire from your competitors only after ensuring that those recruits are not in breach of those agreements that they have signed. If you insist on current employees serving the entire notice period, do not hire new recruits by offering to buy out their notice period
• Initiate firm and decisive action in all deserving cases. It takes significant time and resources in initiating corrective action on erring employees. You may need to commit these resources to take the case to its logical end. Else it will lose its seriousness.
• Engage your employees – Listen to your employees and learn to manage their aspirations. Any employee looks for opportunities outside the organization only when he/she believes such an opportunity does not exist in the current organization.
• Hire smart – Look for motivational fit and cultural fit apart from job fit. You need to make it attractive for applicants to join you despite having these covenants. This requires you to build your brand in the market.
• Manage your confidential information by obtaining patents, trade marks, copy right. Provide access only those who require it and have robust IT security infrastructure.
• Vision and Values matter – Please live your values every day. Celebrate instances where you see someone has set an example. Institutionalize these values by sharing with all employees with real life employees. Like how you reward them for performance, reward them for living values.

Conclusion – A mere agreement might not be sufficient, and it must be ring-fenced with factors like being fair, transparent communication, leading by example and being assertive when needed. You can’t be assured of employee retention just because your employees have signed an agreement to serve for x number of years. I am reminded of a saying by the great Persian Poet Rumi which goes like this ” Everything that is made beautiful and fair and lovely is made for the eye of one who sees”, apt summary.

Please let me know what you think about this issue by writing to me at npattabiraman@gmail.com.

About the author:
Mr. Pattabiraman Nagarajan is a HR professional, Consultant, trainer and an ICF certified coach. Has managed organization change and aligned HR practices to ensure business growth. He holds master degree in Social work and a PG diploma in Business management from IIM Trichy. He could be reached at npattabiraman@relyonus.in.