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Consideration in Non Compete Agreements

Employers often use restrictive employment covenants to protect themselves from employees unfairly competing with the employer after their employment ends.  Such restrictive employment covenants commonly include promises by the employee not to accept employment from a competing business, not to disclose confidential and proprietary information, and not to solicit the employer’s customers or employees.  In order to be valid and enforceable under Connecticut law, the employee agreeing to abide by such restrictive covenants must receive something in return for these promises.  There is an open question under Connecticut law as to whether continuing employment of an at will employee is sufficient by itself to uphold a restrictive covenant.  To ensure that a restrictive covenant will be enforced under Connecticut law, an employer should provide a new benefit to the employee in exchange for the employee’s promises.

A restrictive employment covenant, like any other contract, must be supported by consideration in order to be valid and enforceable.  Consideration means a benefit to the party promising to do something under the contract or a loss or detriment to the party to whom the promise is made.  Thus, in order for a restrictive employment covenant to be supported by consideration, the employee must receive a benefit in exchange for the promise not to engage in certain activities after the termination of his or her employment or the employer must suffer a loss or detriment in exchange for the employee’s promise.  The consideration given does not need to be equivalent in order for the contract to be upheld.  There is no requirement that the benefit received by the employee be of similar or equivalent value to the employee’s promise not to compete with the employer after termination of employment.  As long as there is some consideration, even if not of similar or equivalent value, the contract will be enforced.  

Where an employee has an employment contract in which the employer promises a certain term of employment to the employee, a restrictive employment covenant within such contract is supported by consideration.  Specifically, the consideration consists of the employer’s promise of future employment for a specified term.  A promise to employ the employee for a certain future period constitutes consideration for a restrictive employment covenant regardless of whether it is made as part of the initial hiring of the employee or is made mid-employment.  For example, if after five years of employment an employee and employer enter into an employment contract whereby the employee promises not to compete with the employer after termination of employment and the employer promises employment for the next three years, the employee’s promise not to compete is supported by consideration in the form of the employer’s promise of future employment for a definite term.

The enforceability of a restrictive employment covenant with an at will employee, on the other hand, may depend on whether such covenant was entered into as part of the employee’s initial hiring or after he or she was already employed.  At will employees are employees who do not have a contract for a definite term of employment and may be terminated at any time as long as the termination does not violate an important public policy (such as anti-discrimination law).  Where an at will employee agrees to a restrictive employment covenant as part of the hiring process, the covenant is supported by consideration in the form of the employer’s agreement to hire the employee.  However, under Connecticut law, there is a question as to whether a restrictive employment covenant entered into after an at will employee has already been employed is supported by consideration.  See, RKR Dance Studios, Inc. v. Makowski, No. CV084035468, 2008 WL 4379579, *2-*6 (Conn. Super. Ct. Sept. 12, 2006); United Rentals, Inc. v. Bastanzi, No. 3:05CV596(RNC), 2005 WL 5543590, *4-*5 (D.Conn. Dec. 22, 2005).

One line of Connecticut cases holds that such a restrictive covenant is not supported by consideration, and therefore not enforceable, because the employer is under no obligation to employ the employee in the future.  These cases rely on the general rule that something done in the past (the past employment of the employee) is not consideration for a future promise (the employee’s promise not to compete after termination).  Under this analysis, the employee has agreed to curtail his or her employment prospects after termination and thus suffers a detriment.  The employer, on the other hand, receives the benefit of the employee’s promise not to compete, but gives up nothing in return because it retains the right to terminate the employee at any time.  When analyzed in this manner, the restrictive employment covenant is not supported by consideration and will not be enforced by a Connecticut court.

Another line of Connecticut cases holds the opposite, finding that a mid-employment restrictive employment covenant by an at will employee is supported by consideration.  These cases find that the employer’s ongoing employment of the employee despite the employer’s ability to terminate an at will employment at any time constitutes consideration.  Under this analysis, the employee receives a benefit in exchange for the promise not to compete in that the employee is not terminated despite the employer’s right to terminate an at will employee at any time.  Under this interpretation, a mid-employment restrictive covenant with an at will employee is supported by consideration and enforceable.

Because of the split in Connecticut courts as to whether a mid-employment restrictive employment covenant by an at will employee is supported by consideration and enforceable, employers and employees should be wary of such covenants.  Employers should not rely on them to protect their interests if the employee is terminated or leaves the employer.  Similarly, employees should not undertake activities prohibited by such a restrictive employment covenant on the assumption that it will not be enforced by the courts.  The better course of action is to link a mid-employment restrictive covenant with a new employment benefit.  Where there is an additional employment benefit given in connection with a restrictive covenant, there is no question that such a new benefit constitutes consideration.  For example, there is consideration and a restrictive covenant is enforceable where the employee agrees to abide by the restrictive covenant in exchange for severance benefits to which he or she was not previously entitled.  See, United Rentals, Inc., 2005 WL 5543590, at *5.  A new (higher) commission rate, stock options, and paid vacation have also all been found to be new benefits constituting consideration for a mid-employment restrictive employment covenant by an at will employee.  Van Dyck Printing Co. v. DiNicola, 43 Conn.Supp. 191, 196 (1993) aff’d 231 Conn. 272 (1994); Weseley Software Dev. Corp. v. Burdette, 977 F.Supp. 137, 144 (D.Conn. 1997).

However, employers should be warned that in order to constitute consideration, the new benefit must be given to the employee in connection with the restrictive covenants.  The new benefit will not constitute consideration if it was unrelated to the restrictive covenants even if the new benefit was given to the employee at approximately the same time.  For example, one Superior Court case found that a pay increase did not constitute consideration for a restrictive employment covenant where the pay increase, although contemporaneous to the restrictive covenant agreement, was not related.  Haffnagle v. Henderson, No. CV020813972S, 2003 WL 21150549 (Conn. Super. Ct. Apr. 17, 2003).  Two main factors supported the court’s decision.  First, the employee, a tax accountant, had routinely received similar pay increases at the beginning of tax season (also when the pay increase and restrictive covenant agreement at issue occurred) during her past years of employment.  Second, the agreement containing the restrictive covenant recited that it was in consideration of the employee’s ongoing employment but did not reference the contemporaneous pay increase. 

In order to ensure that restrictive employment covenants are upheld and an employer is protected from employees unfairly competing with it, employers should avoid having an already employed employee agree to be bound by a restrictive covenant without offering something to the employee in return.  Specifically, when seeking a mid-employment restrictive employment covenant from an at will employee, (i) an employer should give a new benefit to the employee in connection with the covenant, (ii) the new benefit should not be something routinely given to employees in the absence of agreeing to the restrictive covenant, and (iii) the agreement should specifically identify the new benefit and state that the employee is agreeing to abide by the restrictive covenants in consideration of the new benefit.