Post-Hire Covenants Not to Compete and Continued Employment – Is This Enough to Make Them Enforceable?
Restrictive covenants pose many issues for employers. Employers want to enforce the covenants they paid for, but former employees often claim those covenants are not enforceable because they are not reasonable in time, scope, or geographical limits. While those issues alone are enough to give an employer a headache, another common question arises when an employer asks an employee to sign a restrictive covenant after the employee has already been working for the employer. The legal issue is whether there is sufficient consideration for that new bargain (a contract must have sufficient consideration if it is to be valid). While every state rules independently on this issue, Hawaii has made clear that for now, continued employment of an at-will employee is sufficient consideration.
In Standard Register, et al., v. Keala, et al. (Civ. No. 14-00291; June 8, 2015), the United States District Court for Hawaii evaluated whether there was valid consideration for an employment agreement which was signed by an at-will employee after employment had begun. While reaching an affirmative conclusion, the Hawaii court noted courts are split on the issue. The Hawaiian Court analyzed rulings around the country and noted that the majority position was that continued employment is valid consideration for employees at will, even if some nuance is attached to it (e.g., employee needs to be retained for a substantial period of time after the agreement is signed). In deciding the majority rule would hold in Hawaii, the Court concluded, among other things, that forbearance (not firing the employee) is sufficient consideration.
When they are entering into post-employment non-compete agreements with their at-will employees, employers must ensure their state recognizes continued employment, standing alone, as valid consideration. If not, other consideration (of even a rather modest amount) must be provided. Failure to take this one step can invalidate your entire agreement.
Brody and Associates regularly provides counseling on employment law issues, including non-competes and restrictive covenants. If we can be of assistance in this area, please contact us at firstname.lastname@example.org or 203.454.0560.