Non-Compete Agreements for Existing Employees

Any small business owner who is thinking of hiring employees should consult with an attorney about the employment law issues he/she may face. It is a lot simpler - and cheaper - to advise a client on the correct steps to take than to deal with a problem after it has arisen. One such issue is a non-compete agreement. I recently faced the issue of a client who wanted to impose non-compete agreements on his existing employees.

The first question is, when does an employer need a non-compete agreement? Non-compete agreements are generally not favored by the courts and they should be used sparingly. The marketplace for highly skilled employees is extremely competitive, but that does not mean that non-compete agreements are the only - or even optimal - strategy for protecting trade secrets or holding onto valued employees. Remember that trade secret and confidentiality agreements may give an employer what he/she needs without the hassle of non-competes.

But let us assume that a business owner would benefit from a non-compete agreement. The next issue will be structuring the agreement for the "mid-stream employee" who is currently employed by the business. For these employees, a non-compete agreement will only be enforceable if it is supported by independent consideration. Indeed, Minnesota courts have also required independent consideration where the employee has accepted an offer of employment but not yet begun work, and where the employee knew he would have to sign a non-compete agreement but did not know the terms until it was presented two him two weeks after he began work.

Independent consideration must consist of "real benefits" which are bargained for between employer and employee. They must be benefits beyond anything the employee is already entitled to receive, either by virtue of his employment or by a separate agreement. Some examples include a cash payment, promotion, a stock option or grant, or participation in a bonus plan. When choosing consideration for a non-compete agreement, it is important to remember that the courts require the consideration to be unique to employees who sign the non-compete agreement. In other words, if an employer offers the same benefit to other employees who do not sign a non-compete agreement, then the consideration is illusory and will not be sufficient.