Employers often ask their employees to sign non-compete agreements. There are two scenarios when this occurs: (1) when the employee is being hired; and (2) after the employee is already working for the employer. North Carolina law looks at these two scenarios in a completely different manner. In general terms, North Carolina law has been viewed as protecting the employer when a potential new employee signs a non-compete agreement.
Meanwhile, North Carolina law has been viewed as protecting the employee when a current employee signs a non-compete agreement. What is the difference in these two scenarios? The answer lies with the consideration necessary to bind the potential employee versus the current employee to a non-compete agreement. “Consideration” refers to the benefit received by the employee in exchange for signing the non-compete agreement. If there is insufficient consideration to support the non-compete agreement, then the non-compete agreement will be deemed to be invalid.
“Consideration” and the Pre-employment Non-compete Agreement
As mentioned, for a potential new employee, North Carolina law favors the employer when enforcing a non-compete agreement. Why? Because the law presumes that the potential employee is in a good bargaining position when the non-compete agreement is signed . . . equal to that of the employer. In other words, the law presumes that the potential employee is in a position to refuse to sign the non-compete agreement. The offer of employment alone is sufficient consideration to support a non-compete agreement for a potential employee. Why? Because the law says that the potential new employee can just say “no” and refuse to sign the non-compete agreement. Unfortunately, this is not reality in a poor economy (or, perhaps any economy).
Can the employee really just say “no?” Let’s face it; the potential employee is very unlikely to get the job if the potential employee refuses to sign the non-compete agreement. The employer will simply move on to the next candidate. In a tough economy, the potential employee effectively has to sign the non-compete agreement or else risk losing the employment opportunity. Does the potential employee really have equal bargaining power with the employer under such circumstances? In the real world, the answer is “no.” Under North Carolina law, the answer is commonly “yes.”
How Does Signing a Non-compete Affect a Current Employee
The second scenario is when a current employee signs a non-compete agreement. North Carolina law treats this scenario in a completely different manner than that of a potential, new employee. With a current employee, the law presumes that the employer has a greater bargaining power. The basis for this is that the employee already has the job and cannot easily say “no” to an employer that is demanding that a non-compete agreement be signed. Since the employee already has the job, North Carolina law provides that keeping the job is insufficient consideration to support the signing of the non-compete agreement. In other words, if the employer says “you can keep your job if you sign this non-compete agreement” and the current employee signs it, then it is likely that the non-compete will be deemed to be invalid due to a lack of consideration. The employee received nothing in exchange for signing the non-compete agreement. The employee already had the job, so additional consideration must be given by the employer to the current employee to support the validity of the non-compete agreement.
What must the employee receive? A bonus, a raise, vacation benefits, a higher commission rate . . . it simply depends upon the circumstances. Litigation often centers on whether the current employee did, in fact, receive any real benefit when signing the non-compete agreement.
Are You Entitled to More Consideration Before Signing a Non-compete Agreement?
We have seen numerous cases where a non-compete agreement has been ruled invalid due to the failure of consideration. However, every non-compete agreement is different. An inexperienced attorney could easily overlook the issue of consideration and focus solely on the non-compete restrictions. This is simply a mistake and could be very costly for the employee. It is recommended that you have experienced counsel to review your non-compete agreement to determine if the consideration is sufficient. The answer is often “no” and the employee is then free and clear to move on to another job.
It pays to have counsel who has both successfully drafted non-compete agreements for employers but who has also successfully advised employees as to the non-enforceability of their non-compete agreements.
If we can help your company in drafting a non-compete agreement or, as an employee, in reviewing your non-compete agreement, then please do not hesitate to contact our Raleigh law firm, Kirk, Kirk, Howell, Cutler & Thomas LLP.
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