Non-Competes, Unsigned Agreement; Quirky Question # 126

We have a non-compete issue. Several years ago, we provided our employees with an employment agreement that contained various post-employment restrictive covenants. When one of our employees left a couple of years later and started competing with us, we took a careful look at the non-compete language in the employment agreement. Simply put, it was not brilliantly drafted. Therefore, we had our lawyers draft a new version of the employment agreement that contained a more carefully crafted (and more comprehensive) non-compete. Because our company also was having some financial difficulties at that time, we also used that opportunity to change everyone’s compensation formula, reducing their compensation.

Most of our employees signed off on the new agreement. Several, however, did not. Nevertheless, we started compensating those employees on the basis of the new compensation system and they continued to work. After another year or so, due to ongoing financial problems at our company, we reduced everyone’s compensation yet again. We presented the employees with a new employment agreement, containing the new compensation formula. We also changed some other terms and conditions of their employment, and significantly enhanced the non-solicitation agreements (both with regard to co-employees and customers) contained in the agreement. Again, some employees did not sign. But, we started compensating them on the basis of the new agreement and they continued to work for us.

A couple of the employees who never signed the revised agreements recently left our company and joined one of our competitors. We’d like to enforce the most recent version of the employment agreement, with its better drafted restrictive covenants, even though they did not sign. Even though they did not sign, they continued working for us. Short of enforcing that agreement, we’d like to enforce the agreement they did sign. Do you see any problems with that plan?

Analysis of Quirky Question # 126, Unsigned Employment Agreement

Responding specifically to the question you posed at the end of your factual description, “Yes, I see problems with your plan.” Let me step back, however, to explain why.

First, as a prefatory observation, keep in mind that there is no federal law regulating contracts that include non-competition provisions or other post-employment restrictive covenants. Like so much of employment law, non-compete issues are dependent on state law. Moreover, the 50 states are by no means uniform in how they treat post-employment restrictive covenants. Some states repudiate these anti-competitive restrictions completely, whether by statute or common law; other states enforce them, largely as written. So, the first challenge you confront is to ensure that you understand where your state falls on the spectrum of repudiation to complete enforcement. Further, you need to understand that if your company is operating in multiple states, you likely will not be able to use a single contract containing identical provisions if you expect to be able to enforce them in all jurisdictions where your company is operating. In short, you need to tailor these provisions depending on location, considering the statutes and judicial decisions of the states where your employees are working.

Second, in your question you comment that you provided your “employees with an employment agreement that contained various post-employment restrictive covenants.” This comment implies that you provided this agreement to both applicants and current employees. If true, you may have a problem with the adequacy of the consideration needed to support these contracts. For new employees, the provision of the job itself typically constitutes adequate consideration. For existing employees, however, separate consideration typically is required to support a post-employment restrictive covenant. Again, however, this varies from state to state, and in some jurisdictions, continued employment may constitute adequate consideration to support the contract, especially when other factors exist. Unless your company is operating in one of those states, you may have a problem with regard to your current employees, separate and apart from the other issues I will address below.

Third, although it is good that you evaluated the quality of your employment agreements and the restrictive covenants contained in the agreements, you do not have complete latitude to alter those documents and impose the new agreements on existing employees. Employment agreements, like any other contract, require an offer, acceptance of that offer, and as referenced above, consideration. Although your company certainly has the right to change the employment agreements it uses, you have to meet the standard requirements needed to establish any contract. You also noted that at the same time you reviewed the employment agreements, you also reduced your employees’ compensation. Given that fact, it would appear that there was no consideration sufficient to support the change in the agreements and the restrictive covenants they contained, even for those employees who did sign.

Fourth, you stated that when you modified your employment agreements, some of your employees did not sign the new agreements. As to these employees, your situation is even more problematic. In my opinion, there are very few courts that will enforce these unsigned agreements. By way of example, in Cypress Group, Inc. v. Stride & Associates, Inc., 2004 WL 616302 (Mass. Super. 2004), a Massachusetts court observed, “[E]ach time an employee’s employment relationship with the employer materially changes . . . a new restrictive covenant must be signed.” Similarly, in Smith-Scharff Paper Co. v. Blum, 813 S.W.2d 27 (Mo. App. 1991), a Missouri court noted that materially altering employee’s salary after employee agreed to a non-competition covenant resulted in unilateral breach by the employer of the employment agreement. (Remember, this is a state-by-state analysis.)

Contracts reflect an accord, an agreement, (or as law school contract professors like to characterize it), a “meeting of the minds.” When an employee refuses to sign an agreement offered to him or her, it is pretty clear that he or she is not “agreeing” to the new terms. At that point, your company had three alternatives: a) the company could have made a greater effort to obtain the signatures of those who balked, offering financial or other incentives to incentivize the employees to sign; b) the company could have made the difficult decision to part ways with the employees who refused to sign; or c) the company could have elected to stick with the original signed agreement. Unfortunately, as discussed below, your company opted for none of those options.

Fifth, you also inquired whether you could enforce the original, signed agreement. Here, your later actions have significantly diminished the likelihood that your initial agreement has any continuing validity. The combination of your alteration of material terms of the original agreement, which you unilaterally imposed on your employees, coupled with your presentation of subsequent employment agreements to your employees vitiates your initial agreement. The fact that you offered your employees new employment agreements presents several problems, especially because you also reduced your employees’ compensation in a manner consistent with the later agreements. This action certainly suggests that your company has abandoned the initial agreement. Alternatively, your decision to begin compensating your employees consistently with the later agreements would appear to be a breach of your original agreement and the compensation terms it contained.

Courts that have examined the enforceability of the original agreement when other agreements were subsequently presented have uniformly found the initial agreement to be unenforceable. For example, in another Massachusetts case, AFC Cable Sys. v. Clisham, 62 F. Supp. 2d 167, 173 (D. Mass. 1999), the court found that a change in the employee’s title from “sales consultant” to “sales manager” and the accompanying modification of his pay structure, as well as the employer’s subsequent efforts to have him sign a new non-competition agreement, indicated that employee had entered into a new employment relationship with employer, thereby voiding the original non-compete agreement he had signed at the outset of his employment. Similarly, in F.A. Bartlett Tree Expert Co. v. Barrington, 353 Mass. 585 (1968), the court held that changes in the employee’s compensation plan, title, responsibility, and territorial assignment, together with the employer’s requests that he sign a new agreement containing restrictive covenants, rendered the restrictive covenants in the agreement signed at the outset of employment unenforceable. As these illustrative cases demonstrate, particularly when an employer changes material terms of an employee’s contract and presents the employee with a new agreement (or multiple new agreements), there is compelling case law that the original agreement is unenforceable.

In sum, your company is confronting a number of serious problems with respect to any attempt to enforce either the later-presented, unsigned employment agreements, or the original signed agreement. In my view, it would not be worth your time or energy or resources to seek to enforce any of these agreements as to the employees who left your organization and who are now competing with your company.