Key Takeaways:

  • Contract restrictions, also known as restrictive covenants, limit a party’s ability to perform certain actions such as competing, soliciting clients, or disclosing confidential information.
  • Common types include non-compete, non-solicitation, and nondisclosure/confidentiality agreements, often used in employment contracts and business sales.
  • Enforceability varies by state—California, for example, generally voids non-compete clauses except in limited circumstances.
  • Employment contracts may add restrictions on termination, post-employment behavior, and the use of company resources.
  • Additional restrictions can appear in intellectual property assignments, exclusivity agreements, and land use contracts, broadening the impact beyond employment.
  • Legal review is critical because improper restrictions may be unenforceable or expose parties to litigation.

Contract restrictions refer to restrictive covenants, which restrict a party from doing something or involve a promise not to do something.

About Restrictive Covenants

These agreements are often called "restrictive covenants" since their purpose is to restrict someone from doing something. In some cases, the agreement offers compensation to the party who agrees to refrain from a specific action.

Various business situations may call for restrictive covenants, such as real estate and land use situations. Restrictive agreements are also common in other business contracts, such as employment contracts. There remains a lot of confusion about the differences in restrictive agreements.

Where Contract Restrictions Commonly Appear

Contract restrictions are not limited to employment agreements. They appear in a variety of business and legal contexts, including:

  • Business purchase agreements: Sellers may agree not to compete with the buyer or solicit former employees for a set period.
  • Intellectual property transfers: Creators may promise not to disclose or use confidential know-how outside the transaction.
  • Franchise agreements: Franchisees are often restricted from opening a similar business nearby during and after the franchise term.
  • Real estate and land use contracts: Covenants may limit how property is used, built on, or resold to preserve value or comply with zoning requirements.

These restrictions aim to protect a party’s investment, reputation, or competitive edge, but the broader their scope, the more likely they may face enforceability challenges.

Types of Restrictive Covenants

A restrictive covenant may be part of a larger agreement or it may be a separate agreement. Employment contracts and agreements with independent contractors frequently contain these types of covenants.

They're also common in business purchases. For instance, a selling business owner may be restricted from the following:

  • Soliciting employees away from the company he or she is selling
  • Competing with the company he or she is selling
  • Disclosing confidential information

Key Elements for Enforceable Contract Restrictions

To increase the likelihood that a contract restriction will be upheld, it should meet several criteria:

  1. Clear and Specific Language: The restriction should state exactly what actions are prohibited.
  2. Reasonable Time Limits: Most enforceable covenants are limited to months or a few years.
  3. Geographic Scope: Especially for non-competes, the restriction should cover only the area where the company actually operates.
  4. Protectable Interest: Courts generally require a legitimate business interest, such as trade secrets or established client relationships.
  5. Consideration: The party giving up a right (e.g., an employee) must receive something of value, such as employment, compensation, or a business sale payout.

Overly broad restrictions that unduly limit competition or basic employment rights are more likely to be voided in court.

Types of Restrictive Covenants

There are three kinds of restrictive covenants.

Non-compete

A non-compete clause is used in the following two situations:

  1. Employment situations when an employer wishes to prevent an employee from leaving the business and then starting a competing company
  2. Business sales agreements where the owner who's selling promises to not engage in competition with the new owner regarding a specific area and time and in a similar company — the seller is usually compensated to not compete

Non-solicitation

This restricts a person from soliciting a business's employees or customers. Usually, an employee who is leaving a business promises not to solicit employees from that business to work for him or her. For instance, Tom leaves ABC Manufacturing and wants to take Molly, his administrative assistant, along with him. If he's signed a non-solicitation agreement, he's not allowed to take her with him to his new company.

These types of covenants are often used for professional practices. In many instances, the departing professional is also restricted from soliciting patients, customers, or clients of the practice.

Nondisclosure or Confidentiality

This type of agreement is designed to prevent a person from discussing or stealing proprietary information that provides the owner with a competitive advantage. This type of proprietary information includes inventions, trade secrets, and other confidential information.

Problems with Restrictive Agreements

The various types of restrictive agreements attempt to prevent a person from taking something from a business, such as employees, customers, trade secrets, proprietary products, or business in general. The issue with all of these covenants is enforcement. Once the damage is done — a competitor has destroyed a business or confidential information has been taken — the process to legally recover damages is often lengthy and costly. No one really benefits but the attorneys.

Some states, like California, have struck down non-compete covenants on the grounds that they unduly restrict competition. Before you put any restrictive covenants in a contract, consult an attorney and review your state's laws regarding them.

State Law and Public Policy Concerns

State law plays a major role in the enforceability of contract restrictions:

  • California, North Dakota, and Oklahoma largely prohibit employment-related non-competes, with narrow exceptions for business sales.
  • Other states allow non-competes if they are reasonable in duration, geography, and scope.
  • Public policy concerns arise if a restriction effectively prevents someone from earning a livelihood. Courts often strike down provisions that appear punitive rather than protective.

Understanding local statutes and case law is critical. A restriction valid in one state may be unenforceable in another.

Employment Contract Restrictions

Employment contract restrictions may be found in employment contracts. They restrict what employees and employers can do during and after their employment relationship. Keep in mind that employment contracts may be legally binding, whether they're implied or express, written or oral. Other company documents like an employee handbook can include binding restrictions on the employment relationship.

Employment contracts may have restrictions on termination that supersede any state law presuming at-will employment. At-will employment refers to an employee or employer being able to terminate employment for any reason or none at all. Legal exceptions are provided by laws that protect employees from discrimination and other illegal practices.

Employment contracts may contain “for cause” restrictions, which don't necessarily mean misconduct but may include a specific reason, such as ongoing incapacity to perform. It will be up to the courts to determine what “cause” means if the term isn't specifically defined in the agreement.

Because contracts are designed to be legally binding documents, you should fully understand the terms and conditions you're agreeing to before you sign. You may want to consult a professional who is experienced in contract law to explain any complex legal language to you.

Common Modern Contract Restrictions in Employment

Beyond traditional non-competes and non-solicitation clauses, employment contracts may also include:

  • Non-disparagement clauses: Prevent former employees from making statements that could harm the company’s reputation.
  • Intellectual property assignments: Require employees to assign inventions created during employment to the employer.
  • Garden leave provisions: Require employees to remain on payroll but out of work during notice periods to prevent immediate competition.
  • Exclusivity clauses: Prevent employees from working for competitors or starting side businesses while employed.

Employers should balance protection with fairness, as overly aggressive restrictions can lead to employee turnover, reputational harm, or legal disputes.

Frequently Asked Questions

1. Are all contract restrictions enforceable? No. Courts only enforce restrictions that are reasonable, clearly drafted, and supported by legitimate business interests.

2. How long can a non-compete clause last? Most enforceable non-competes last from six months to two years; longer durations are rarely upheld unless tied to the sale of a business.

3. Can an employer restrict an employee after termination without a signed agreement? Generally no. Restrictions must be part of a written contract or supported by clear consideration.

4. Are non-solicitation agreements easier to enforce than non-competes? Yes. Courts are more likely to uphold restrictions that target solicitation of clients or employees rather than a blanket ban on working elsewhere.

5. Should I consult a lawyer before signing a contract with restrictions? Absolutely. Legal review ensures you understand your rights, risks, and local enforceability before committing.

If you need help with contract restrictions, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.