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As the authoritative force in Employment Law, we are committed to ensuring that we live up to our word by keeping you in the loop, informed, and enlightened about various legal and non-legal issues related to labor law. Through our ongoing series, we have provided you with key information on how to enforce restrictive covenants and protect trade secrets. To ensure that we keep you in the loop, this blog is Part B of Part II of our abridged series titled “Fundamental Aspects of Restrictive Covenants.” In Part A, we provided you with a hands-on guide related to “Ensuring Restrictive Covenants are Adequately Considered for Incoming Employees.” As a crucial update of this series, we have hammered in how to “ensure restrictive covenants are adequately considered” for “current employees” in this blog and Part B of Part II of the series.

Ensuring Restrictive Covenants are Adequately Considered for Current Employees

The Case for Current Employees

The issue whether an employer must provide, while enforcing a restrictive covenant, consideration beyond an ongoing employment relationship is determined by state law when such an employer seeks to impose a restrictive covenant on a current employee. Courts in many jurisdictions consider sufficient consideration to be comprised of the employer’s agreement for the continuation of at-will employment. In others, substantial continued employment may be deemed to constitute sufficient consideration in support for imposing restrictive covenants on current employees. However, courts in some jurisdictions required the restrictive covenant to be incidental or ancillary to the relationship of employment. This is why courts in some jurisdictions require parties to complete the ancillary agreement test.

Ideally, if a restrictive covenant is designed to ensure that one of the parties fulfil their contractual obligations, then such a restrictive covenant is deemed ancillary to a contract. In some cases, an employer may promise to provide an employee with proprietary information if such an employee also promises to protect it. In such a situation, there may be a need for a restrictive covenant. However, a restrictive covenant would not be justified based on a promise to provide only money. In most cases, courts look into a number of factors when assessing how adequate the additional consideration for a restrictive covenant imposed on an employee is. Examples of such factors include, but not limited to (1) the breadth of the restrictions, (2) the salary history and previous benefits of the employee, (3) the responsibility level of the employee, and (4) the type of job in question. When viewed in light of those factors, the consideration exchanged for the restrictive covenant must be material. Therefore, in relation to the employee’s prior salary, a restrictive covenant may not be supported by a pay rise or bonus of a mere token amount. Similarly, adequate consideration may not be comprised of the benefit promise also offered to all other employees by the employer.

The probability that a court will void an agreement for lack of adequate consideration would be undermined by an offer of a blend of incentives such as different or new benefits, pay rise, or bonus to the current employee. Further, courts may deem sufficient consideration to be comprised of a change in the employee’s responsibility (such as promotion) or status (such as from a probation to employment permanency). It, therefore, goes without saying that executing new covenants shortly or immediately after a change of employee status is a best practice for ascertaining that restrictive covenants are adequately considered for current employees.

The odds that a restrictive covenant would be found binding by a court would be increased if an employer re-executes restrictive covenants at varying stages of an employee’s career. This means that a court may find a recent agreement enforceable despite the lack of adequate consideration in another executed imposed earlier in the course of employment. Ideally, an employer must make sure that every new agreement is tailored to the specific employee. A court may be persuaded, following its assessment of adequacy, to rule in favor of the employer’s legitimate interest by customizing restrictive covenants with the particular level of responsibility, training, and job duties and, thus, barring the employee from competing unfairly with the employer.

In Part III of this series, we will move the discussion in this series forward and provide you with a hands-on guide on “How to Determine the Employer’s Legitimate Protectable Interests.”

Until then, stay tuned and enjoy series to come. In the interim, reach out to us with questions or comments on our website at the Contact Us page!

Always rising above the bar,

Isaac T.,

Legal Writer & Author.