Can Employers Include Restrictive Covenants in Severance Agreements?

 Posted on June 19, 2023 in Employment Law

By Attorney Jaclyn Kallie

Employment relationships can sometimes end in less-than-ideal circumstances, such as downsizing, layoffs, the elimination of a position due to company restructuring, or the termination of an employee for other reasons. When these relationships come to an end, an employer may offer an employee a severance agreement, which may provide them with severance pay in return for following certain requirements or restrictions. These agreements may include terms known as "restrictive covenants" that are meant to protect the employer's interests and prevent unfair competition. To ensure that these terms will be enforceable, an employer can work with an employment law attorney to draft severance agreements that will meet their needs.

Wisconsin Laws Addressing Restrictive Covenants

Restrictive covenants are contractual clauses that may limit a former employee's ability to work for an employer's competitors or disclose confidential information after the employment relationship ends. These covenants can come in a variety of different forms. For example, non-compete agreements may state that an employee cannot work for any companies that directly compete with their former employer, and they cannot start a new business in the same industry. Non-solicitation agreements may restrict a former employee from contacting others who work for the employer and attempting to hire them or from contacting the employer's customers. Confidentiality or non-disclosure agreements may also be used to ensure that a former employer does not share a company's proprietary information or trade secrets with others.

Wisconsin law has specific requirements that must be met in order for restrictive covenants to be enforceable. First, the restrictions must be necessary to protect the employer's legitimate business interests. This means that the restriction must be reasonable in scope, duration, and geographic area. For example, a non-compete agreement that applies throughout the entire United States may not be reasonable for a local restaurant, but it could be appropriate for a technology company. A restrictive covenant that is overly broad will likely be unenforceable.

Second, restrictive covenants must be supported by consideration. Consideration is something of value that the employee receives in exchange for agreeing to the restriction. In the context of a severance agreement, consideration will generally involve severance pay, although it may also include other forms of compensation, such as extended benefits or the ability to retain ownership of a company computer.

Third, the covenant must not go against public policy. Wisconsin law disfavors restrictions that limit a person's ability to work. Therefore, courts will carefully scrutinize non-compete agreements to ensure that they do not impose overly severe restrictions and unreasonably restrain an employee’s ability to work in a field where they can use their skills and experience. A restrictive covenant must strike a balance between protecting the employer's interests and ensuring that the employee's future opportunities will not be unfairly limited.

Fourth, restrictive covenants must be clear and unambiguous. The employee must have a reasonable understanding of what they are agreeing to and the ways they may be affected in the future. If an agreement is vague or ambiguous, it may be unenforceable.

Finally, restrictive covenants must not be overly burdensome to the employee. They must apply for a reasonable time period and within a reasonable geographic area. In general, restrictions may only apply for a few years, and they may only apply in regions where an employer does business. A restriction that is too broad may be unenforceable. For example, if a non-compete agreement prevents an employee from working within a certain distance of any of an employer's office locations throughout the United States, but the employee's duties had previously been limited to the state of Wisconsin, these terms would likely be considered overly broad and unfair to the employee.

Contact Our Milwaukee Severance Agreement Lawyers

While restrictive covenants can be powerful tools that employers may use to protect their interests in severance agreements, they must meet specific requirements to be enforceable. At Gimbel, Reilly, Guerin & Brown, LLP, our Milwaukee, WI employment law attorneys can provide guidance for employers, helping them create severance agreements that will be valid and enforceable. Our attorneys can also help employees understand the legality and application of severance agreements they may be offered. To get legal help with these issues, contact our firm at 414-271-1440 and set up a consultation.

Sources:

https://docs.legis.wisconsin.gov/statutes/statutes/103/465

https://webapps.dol.gov/elaws/faq/esa/flsa/007.htm

https://www.abcwi.org/wisconsin-contractor-blog/nlrb-decision-restricts-employers-use-of-confidentiality-and-non-disparagement-clauses-in-severance-agreements/