Non-competes for Existing Employees May Require Additional Consideration

It is not uncommon for employers to ask existing employees to sign non-compete agreements. For example, new management may want to tighten up a company’s protections. Or, changes in the business may make the need for employee non-competes more important.  But non-compete agreements signed by existing employees are not always enforceable and often require the employee to receive meaningful new consideration. In other words, the employee must receive something of value in return for the promise not to compete.

The majority of states permit continued employment by itself to serve as consideration for a non-compete agreement. In at least twelve states, however, some form of additional consideration is required.  And, in at least six other states, the law regarding the need for additional consideration is unclear.

The requirement of additional consideration is usually driven by a concern that employers otherwise might insist that employees sign “afterthought” non-compete agreements shortly before firing them. Such a move would seriously limit opportunities for new employment with no offsetting benefit for the employee.

The type and amount of additional consideration necessary varies significantly depending on the state in which the agreement is being enforced. In most states that require consideration beyond continued employment, additional consideration can take the form of a change of job duties, a promotion, additional compensation or additional benefits.  Access to confidential information or additional training may also suffice.  In North Carolina, a one-time payment of $500 has been deemed sufficient consideration for an existing employee’s non-compete agreement.

Courts may also consider the length of time the employee remained employed after signing the non-compete. At one extreme, an Illinois appeals court has held that an existing employee must receive at least two years of additional employment before a non-compete is enforceable.  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 non-compete the employee may be able to void the agreement based on fraudulent inducement.

When drafting a non-compete agreement for an existing employee, check the rules for the state whose law is most likely to apply and consult with counsel to ensure that your company’s agreement complies with those rules. And it’s always best to expressly state in the agreement exactly what additional consideration the employee is receiving in exchange for the covenant not to compete.

Finally, in addition to the questions of whether and how you can ask existing employees to sign non-competes, be aware of the many other considerations regarding whether a non-compete agreement is enforceable.