Consideration is often thought of as what you will get in return for signing a restrictive covenant or non-compete agreement with your company. Where a restrictive covenant is executed as part of an original employment agreement, the offer of employment is generally considered adequate consideration for the enforcement of the covenant.
When an ‘existing’ employee is asked to sign a restrictive covenant, consideration becomes more of a complicated issue. In some states, such as Iowa, continuation of employment typically constitutes sufficient consideration when a current employee enters into an agreement. However, even states that recognize continued employment as consideration, questions remain regarding how long that employment must continue to be deemed adequate consideration.
Other states, such as Pennsylvania and Washington do not recognize continued employment, regardless of the length, as adequate consideration for enforcing a restrictive covenant/non-compete agreement. Although Minnesota agrees that continued employment alone is not enough, if the parties include statements agreeing to be legally bound to the agreement ‘as is’, the covenant will likely be enforceable despite the lack of separate consideration.
Even when something more tangible is given in exchange for signing an agreement, there is no real measure of what is enough. In a recent case in North Carolina, the court found that a mere $100 dollars was adequate consideration when a defendant in a non-compete case complained it was not substantial enough to enforce her non-compete. The courts decision reiterated the state’s rule that as long as some tangible consideration is paid in conjunction with a mid-employment non-compete, courts will not inquire as to the adequacy of the consideration. Based on this decision, employers could offer a nominal payment while conditioning continuing employment on the employee signing the agreement.
Given all the variations in state laws, some companies are taking steps to minimize consideration issues arising from reliance on continued employment alone. Many are offering increased compensation, signing bonuses or promised future bonuses, job training and promotion as consideration for signing a restrictive covenant. Before signing a restrictive covenant, employees should be aware of a number of possible monetary or non-monetary benefits that could serve as consideration. Prior to entering into a non-compete agreement or restrictive covenant at hiring or during employment, employees should seek legal counsel to explore the possible pitfalls or, perhaps, take measures to improve the offer by pursuing increased consideration or limiting the covenant restrictions before signing.
Related Posts: Iowa Non-Compete Law
Source: JDSupra.com, “NC Court of Appeals Finds $100 Adequate Consideration to Support Non-Compete”, by Jonathan Crotty & Michael Vanesse, October 12, 2015.