How to Ensure Noncompete Pacts Are Nonissues
Legal expert Ken Kirschenbaum offers some considerations you can and cannot address in a noncompete clause.
A client recently asked me, what consideration should you require an existing employee to sign an employment agreement with a restrictive covenant, such as a noncompete clause?
I recommend every one of your employees be required to sign an employment agreement like that available at alarmcontracts.com.
Enforcement often varies by state, so it is best to obtain customized employment agreements to accommodate your state. The reasoning for using an employment agreement is easy to explain; so you don’t have disputes regarding the terms of employment and, more importantly, terms affecting the employee after employment has terminated.
Competition from a former employee who is in possession of your confidential business records will happen only once before you are convinced you should have had an employment agreement signed.
But what about existing employees? Can you require them to sign an employment agreement without providing some consideration? Specifically, is “continued employment” sufficient consideration so that the employment agreement will be enforced?
The legal canvas is changing for restrictive covenants imposed on existing employees, with courts in several jurisdictions requiring something beyond continued employment as adequate consideration for a binding noncompete agreement.
The consideration needed to satisfy this requirement can take various forms, such as a cash bonus, specialized training, a promotion or a raise at the time the employee is asked to sign the noncompete agreement.
States that require something extra (beyond continued at-will employment for a binding noncompete agreement) include: Hawaii, Kentucky, Minnesota, Missouri, Montana, New Hampshire, North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Virginia, Washington, West Virginia, Wisconsin and Wyoming.
In Missouri, in 2016 a federal district court held that at-will employment alone, or the continuation thereof, is insufficient consideration for a noncompete agreement, as the employer makes no “legally enforceable promise to do or refrain from doing anything that it is not already entitled to do” (Durrell v. Tech Elecs. Inc., No. 4:16 CV 1367 CDP, 2016 BL 380008).
For midstream non-compete agreements to be enforceable in Pennsylvania, courts have specified that employers must provide “new” and valuable consideration.
Examples listed by one court in 2015 included “a promotion, a change from part-time to full-time employment, or even a change to a compensation package of bonuses, insurance benefits and severance benefits” (Socko v. Mid-Atl. Sys. of CPA Inc., 633 Pa. 555, 126 A.3d 1266, 40 IER Cases 1568).
A New York court refused to enforce a noncompete clause that was incorporated into a stock option agreement because it lacked adequate consideration.
The court found that the agreement’s promise of continued employment was illusory and thus no right was ever conferred upon the employee (NBTY Inc. v. Vigliante).
In North Carolina, a one-time payment of $500 has been deemed sufficient consideration for an existing employee’s noncompete agreement.
Courts may also consider the length of time the employee remained employed after signing the noncompete. At one extreme, an Illinois appeals court has held that an existing employee must receive at least two years of additional employment before a noncompete is enforceable (Fifield v. Premier Dealer Servs. Inc.).
At the other extreme, the Wisconsin Supreme Court has held that there is no minimum amount of additional employment required, but if an employer terminates an employee shortly after executing the noncompete the employee may be able to void the agreement based on fraudulent inducement.
In Florida, Maryland and Georgia, continued employment is adequate consideration to enforce a binding noncompete accord. Courts may also consider the length of time the employee remained employed after signing the noncompete.
When it comes to restrictive covenants, California doesn’t just limit enforceability. The state prohibits noncompete agreements altogether, and, with recent law changes, it allows employees to sue an employer that tries to enforce a noncompete agreement against them.
In Massachusetts, a new law went into effect Oct.1, 2018 severely limiting the restrictions an employer can place on its employee. To be enforceable, the noncompete agreement must contain a ‘garden leave’ provision, whereby if the employer chooses to enforce the restrictions it has to pay the ex-employee 50% of their highest base salary from the prior two years for up to one year.
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