Can an employer make noncompete and confidentiality agreements a condition of employment for current employees?

Noncompete and confidentiality agreements are most commonly introduced during the hiring stage of the employment relationship. However, there are several legitimate instances where an employer may wish to introduce these agreements after the employment relationship has begun. Employees being promoted into critical positions or part of a merger or acquisition are two scenarios whereby an employer may wish to enter into a noncompete agreement with an existing employee.  

For a noncompete agreement to be beneficial at any stage in the employment relationship, it should pass three important tests. First, the agreement should be legal. Several states have made these types of agreements difficult to enforce. California, for example, has effectively banned these agreements, except under certain limited circumstances. Therefore, it is important that employers consult with legal counsel and are well aware of the legal landscape associated with the enforcement of these agreements in their state before proceeding.

The second test is the reasonableness factor. In states where these types of agreements are upheld, courts will still refuse to enforce agreements that restrict the movement of the employee so severely that he or she would not be able to make a living. Two common criteria courts examine when applying this test are geographical restrictions and the length of time the employee must wait before seeking employment with a competitor.  

An additional factor affecting noncompete and confidentiality agreements is the concept of consideration. Noncompete agreements are considered to be contracts, and in order for contracts to be valid, there should be an exchange of consideration between both parties before the contract is executed. In a pre-employment scenario, the consideration is simple: the candidate will either accept the terms of the noncompete agreement and the job, bringing with it a salary and benefits, or the candidate will walk away. Ultimately, if the candidate chooses to walk away, nothing is lost. 

However, for a current employee, choosing to walk away means that his or her employment can be lost, and this is where the concept of consideration is significant. To negate this concept, the employer must offer something of value to the employee in exchange for entering into the contract. For example, in a promotion scenario, the employee is offered the job and an increase in pay in exchange for signing the noncompete. If the employee chooses not to sign the noncompete, he or she does not receive the promotion, but nothing is lost because the employee retains his or her current job. However, if the employer effectively threatens the employee with a loss of employment if a noncompete agreement is not signed, it is likely that courts would find the agreement unenforceable because no consideration was provided and the employee could argue he or she entered into the agreement under duress. 

Because of the possible legal implications, it is wise to either introduce noncompete and confidentiality agreements at the start of the employment relationship or allow the employee to consider the agreement with no threat of loss of employment should he or she refuse to sign it. Employers should seek legal counsel to ensure compliance with state laws regarding noncompete and confidentiality agreements.