Can Current Employees Sign a Non-Competition Agreement?

Wisconsin recently became the thirtieth state to follow the majority rule when it comes to consideration for non-competition agreements. It held that continued employment constitutes lawful consideration for a non-compete agreement signed by an existing at-will employee (i.e., one that does not have a contract). 

What is consideration in a contract?

Backing up for a moment, let me explain some basics of contract law that are in play here. To have a valid contract, such as a non-competition agreement, you need to satisfy a few basic elements of contract law. You need an offer, an acceptance, a meeting of the minds (you both understand the intention of the contract), and consideration.   Consideration is the payment or reward exchanged for the contract performance or promise of performance. In a contract, one consideration is exchanged for another consideration.

So for a contract asking an employee not to compete with your business when his or her employment ends, that consideration could be an offer of employment when they are hired, a bonus, a raise or a promotion. Or in a majority-rule-state it could mean you can have an existing employee sign a non-compete agreement (or modify an existing agreement) and offer nothing more in consideration than a promise to continue his or her employment.

(Note that if your business is in California, Oklahoma or North Dakota, non-compete agreements are not valid at all no matter the consideration).  

Runzheimer Int’l, Ltd. v. Friedlen (Wisc. 2015).

In the Runzheimer case, Runzheimer International, Ltd., employed David Friedlen at will for more than fifteen years before Runzheimer required all of its employees to sign non-compete agreements. The agreement provided, in relevant part, that for a period of 24 months following the end of Friedlen’s employment with Runzheimer, Friedlen would not use or disclose Runzheimer’s confidential information, would not directly or indirectly sell to protected customers, and would not directly or indirectly provide services to Runzheimer’s competitors.

Runzheimer allowed Friedlen to review the non-compete agreement but told him he would be fired if he did not sign it within two weeks. Friedlen signed the non-compete agreement. Twenty-nine months after Friedlen signed the agreement, Runzheimer terminated his employment.

Following his termination, Friedlen reached began working for Corporate Reimbursement Services, Inc. (CRS), a competitor of Runzheimer. Runzheimer filed suit against both Friedlen and CRS, alleging that Friedlen breached the non-compete agreement and that CRS tortiously interfered with the non-compete agreement.

The trial court held that the non-compete agreement was not supported by consideration: “Runzheimer made an illusory promise of continued employment to Friedlen. Such a promise cannot constitute consideration for the Agreement. The fact that Friedlen continued his employment with Runzheimer for years after the Agreement does not change the analysis.”

On appeal, the Wisconsin Supreme Court disagreed. It reversed the decision of the trial court, holding that “an employer’s forbearance in exercising its right to terminate an at-will employee constitutes lawful consideration for signing a restrictive covenant.” 2015 WI 45, ¶¶ 5, 59.

The Majority Rule: Continued Employment = Consideration.

The Runzheimer decision thus makes Wisconsin the thirtieth state to hold that continued employment constitutes lawful consideration to support a non-compete agreement signed by an existing at-will employee. Other states in which this is the rule include: Alabama, Arizona, Arkansas, Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New York, Ohio, South Dakota, Tennessee, Utah, Vermont, and Virginia.

If your business is in one of those states that follow the majority rule, the door is open for you to implement or modify non-compete agreements with your existing at-will employees. Employers can require existing at-will employees to sign non-compete agreements without having to offer additional consideration such as increased pay, a bonus, or a promotion.

Before doing so, however, please check with your attorney for how to proceed. Each state has its own nuances, including some that specify how long you must continue employment after the employee signs a non-compete.

In addition, you should also consider the following tips:

  • Tell the employee in writing that signing the non-compete agreement is a condition of continued employment—that is, the employee will be fired if they do not sign it.
  • Be ready to terminate an employee who refuses to sign the non-compete agreement.
  • Be prepared for the possibility that an employee may decide to quit rather than sign the non-compete agreement. In that case, you may want to include additional consideration with the non-compete agreement, even though you do not have to do so.
  • Be careful about terminating an employee shortly after the execution of a non-compete agreement. As noted above, some states specify the duration of continued employment that is required. In Wisconsin, Runzheimer left that question open.