All contracts need to have what is called adequate “consideration.” The nature of a contract is that each party to the contract is giving the other party something in exchange for what the other side is providing. This is easy to see in a sales contract where a fabric sales representative sells a clothing factory so many bolts of cloth for so much money. The “consideration” is the exchange. In that example, the consideration for the cloth is the money. The consideration for handing over money is obtaining the cloth.
In non-compete agreements an employee is agreeing not to engage in competitive activities following termination of employment with that employer. This is an activity in which the employee would usually be able to engage (absent the use of the former employer’s confidential information or trade secrets). Thus, the employee is giving up a legal right – and needs to get something (some “consideration”) from the employer in exchange.
In many states, such as New York, employment or continued employment is considered sufficient consideration. More specifically, where a non-compete agreement is signed on hire, the fact that the employee is getting a new job is considered sufficient consideration for the employee giving up his or her right to compete following the termination of that employment.
An issue can arise, however, with what are called “mid-term” agreements. These agreements are used where an employer determines in the middle of an employee’s term of on-going employment to have one or more employees sign non-compete agreements. In some states, continued employment in these situations is considered sufficient consideration for the agreement not to compete. In others, however, such as Pennsylvania and Massachusetts, the company needs to give the employee something in addition to continued employment in exchange for obtaining the agreement not to compete post-employment. This additional consideration could be a raise, additional vacation days, a bonus, or some other tangible thing of value. States vary in terms of what is acceptable consideration to give employees in these situations, and there are fact-specific determinations that might govern a given situation.
If there is not sufficient consideration given in exchange for an employee’s agreement not to compete, a court may find that the agreement is not enforceable. The company would then not be able to go into court to get an injunction or other order to stop competition in violation of the agreement.
Should you wish to implement non-compete agreements with your employees, be sure to consult with employment counsel to ensure that there is sufficient consideration to support your agreements so they can be enforced should you need them to be.