Employment Agreements: Checklist for Enforceability

I. INTRODUCTION

Employment is the lifeblood of personal and professional self-esteem and the lifeline by which to support one’s family. Job mobility is more important than ever as our country faces uncertain economic times. Employment is conceptually simple: a business entity requires certain services and hires employees to meet its needs. Often the priorities and concerns of the employer and the employee will diverge.

Both, however, wish to be protected from adverse consequences upon the termination of the employment relationship. The employer seeks protection from a former employee engaging in actions harmful to the company, while the employee wants free rein to secure new employment. Employer protection often takes the form of restrictive covenants, of which “non-competition agreements” are perhaps the best known.

II. NON-COMPETES AS CREATURES OF CONTRACT

The touchstone of an employer-employee relationship is the employment contract, a document that can take as many forms as there are jobs to fill. They frequently have many of the same sections: identification of the parties, the specific employment position, location, term (if any), duties, compensation, and restrictive covenants.

Restrictive covenants protect the interests of the employer by restricting the activities of an employee upon termination and can take several forms, including “confidentiality clauses,” “non-solicitation clauses,” or “non-competition clauses” a/k/a “covenants not to compete.”

A covenant not to compete is the most common legal vehicle to preclude a former employee from obtaining new employment that would likely cause the company to suffer adverse consequences. While Connecticut law pays lip service to the notion that “every contract, combination, or conspiracy in restraint of any part of trade or commerce is unlawful,” the courts have enforced restrictive covenants as long as they are reasonable in temporal and geographic scope and provide the employer with no more protection than it reasonably requires.

Restrictive Covenants

Restrictive covenants are contractual provisions to which signatory parties agree and intend to be legally bound. Courts have justified their role in enforcing restrictive covenants by enunciating a policy statement that “to permit a party who has voluntarily entered into such an agreement, for a valuable consideration perhaps in large part based on it, to escape the consequences of his acts… smacks of unfairness and savors of an encouragement to dishonesty.”

Courts view it as unconscionable to permit a party to avoid contractual obligations contained in an enforceable agreement that he/she willingly entered into and from which he/she received a sufficient benefit. This policy is based on the idea of “fairness” and is meant to discourage contractual breaches. A crucial factor in a court asserting its power to enforce a restrictive covenant is that the underlying agreement must itself be valid and enforceable.

A. Consideration for the Covenant Not to Compete

An enforceable contract requires the parties to experience a respective benefit or detriment that they would not otherwise receive or suffer in association with the terms and conditions they agree to, a legal concept referred to as “consideration.” This essential element of a contract is defined as “any benefit conferred, or agreed to be conferred, upon the promisor, by any other person, to which the promisor is not lawfully entitled, or any prejudice suffered, or agreed to be suffered, by such person, other than such as he is at the time of consent lawfully bound to suffer, as an inducement to the promisor. . . .”

The employee gives the employer his time, energy and resources in exchange for a variety of benefits, including salary, healthcare, 401(k), severance package, and bonuses. The existence and adequacy of consideration is crucial to the validity of an employment contract: “the doctrine of consideration is fundamental to the law of contracts, the general rule being that in the absence of consideration an executory promise is unenforceable.”

Under Connecticut law, courts may refuse to enforce a restrictive covenant when the contract lacks bargained-for and sufficient benefits or detriments. It is customary (but not necessary) for the ebb and flow of consideration between the parties to be detailed and acknowledged in the employment agreement.

Courts have been open to accepting evidence of an oral agreement to establish the requisite consideration. Affidavits have been used to prove an oral agreement whereby an employee consented to signing a non-compete agreement in exchange for a promotion or other form of benefit associated with his/her employment. Under certain circumstances, oral agreements have been similarly upheld.

(i) At Will Employment

A more complex sub-issue with respect to consideration is determining what is “adequate” in order to validate and render an employment agreement enforceable. Under Connecticut law, the standard differs depending on whether or not the employee is classified as an “at-will employee.” This classification has distinct attributes with regard to the adequacy of consideration and will be scrutinized by the courts.

The state of Connecticut adheres to the “At-Will Employment Doctrine.” “[I]n Connecticut, an employer and employee have an at-will employment relationship in the absence of a contract to the contrary,” that “grants parties the right to terminate the relationship for any reason, or no reason, at any time without fear of legal liability.” At-will employment is the default employment relationship unless the parties contractually declare otherwise.

Permanent employment is classified as an “indefinite general hiring” where either party may terminate the employment relationship without liability to the other when there is not a contract specifying consideration for the services to be rendered in conjunction with employment. This At-Will Employment Doctrine is subject to certain limitations and restrictions under Connecticut law as further informed by public policy. Courts may recognize and grant an exception to the doctrine when a termination is otherwise a clear violation of public policy.

(ii) Other than “At Will” Employment

The bar is set considerably higher for employers that provide employees with a contract of employment and the courts are more demanding in what they will deem “adequate consideration” to bind the parties to the employment and non-compete agreement.

If the non-compete agreement or the employment contract containing a restrictive covenant is executed prior to the employee commencing work, there is a prima facie case for adequate consideration flowing from the clauses stipulating the employee’s compensation and other employment-related benefits. There is an issue, however, when the parties execute a non-compete agreement after employment has begun and the employer brings an action to enforce the non-compete provision.

In Connecticut, for other than at-will employees, continued employment alone is insufficient consideration and there must be a new and adequate defined benefit to make the non-compete agreement binding. The courts require that the employer confer a new/enhanced benefit upon the employee in order to induce him to additionally covenant post-employment to abstain from certain activities.

It is a well-settled facet of Connecticut employment law that with respect to other than “at will” employees, “continued employment is not [adequate] consideration for a covenant not to compete entered into after the beginning of the employment.”

(iii) Past Consideration

As a corollary, consideration offered when executing one contract cannot be carried forward and applied to subsequent contracts so as to render both contracts valid and enforceable. Past consideration is for the same reason inadequate to support a restrictive covenant sought to be imposed after employment begins or to support the imposition of a new contractual obligation on an employee after the commencement of work pursuant to an employment agreement. A court may decline enforcement of a restrictive covenant against a non-”at-will” employee when the only consideration was continued employment by the plaintiff employer.

Adequate Consideration

The situation is different when an employee is classified as “at-will” with the bar set much lower for a court to find “adequate consideration”. Connecticut has historically accepted continued employment as adequate consideration for the imposition of new obligations under a restrictive covenant after employment has begun. This principle applies to both state and federal courts located in the state of Connecticut, as the federal court has specifically acknowledged that “Connecticut recognizes that continued employment is adequate consideration to support non-compete covenants with at-will employees.”

The policy underlying the different treatment of “at-will” employees is based upon the fundamental nature of “at-will” employment. Under this employment relationship, the employer at any time it sees fit has the right to terminate the employee for any reason, or no reason at all.

The prospect of continued employment as consideration for a non-compete is viewed as a new bargaining event where new benefits are offered and conferred upon the parties. The employer receives services and benefits associated with the restrictive covenant while the employee receives continued employment, a benefit he is not otherwise entitled to under the existing employment relationship.16 As a practical matter, however, all the employee receives is the employer foregoing its right for yet another day to fire the employee for good cause, bad cause, or no cause at all.

B. Signatures

A second issue that can affect a non-compete’s enforceability is absence of the signatures of the parties. Several issues can arise when a contract is not signed by both parties at the same time, when one party fails to sign altogether, or when a party questions in good faith whether he signed the agreement at all. The employer and the employee must sign the non-compete agreement to make it legally binding when the agreement is clearly a bilateral contract.

A purported written agreement can be rendered unenforceable if one party fails to sign. Agreements stipulating that the signatures of both parties are necessary do not become legally binding until both of the parties have actually affixed their signatures to the document.

Parties have occasionally argued that they “intended to sign” the agreement, but this position has been rejected and courts have held that “intent to sign” is not a substitute for an actual signature. A separate issue arises when both parties apparently sign the restrictive covenant but one of them cannot recall if they actually did so and for that reason questions the enforceability of the agreement. Where a party disputes or cannot recall signing, the courts have accepted testimony from handwriting experts to ascertain the validity of the signatures on the non-compete agreement.

C. The Need for a “Meeting of the Minds”

There must be in fact a meeting of the minds with regard to the contractual terms and conditions in order to create an enforceable agreement between the parties. Courts have held that “in order to form a binding and enforceable contract, there must exist an offer and an acceptance based on a mutual understanding by the parties…The mutual understanding must manifest itself by a mutual assent between parties.”

This requirement means that “it is not the subjective meeting of the minds, but the objective manifestation of mutual assent, that is essential to the making of a contract.” The parties are presumed to have had a “meeting of the minds” in the opinion of the court when the language in the contract is clear and unambiguous in articulating the contractual clauses.

A party may challenge the agreement and argue that it is invalid and unenforceable because of ambiguous language that fails to demonstrate the requisite meeting of the minds. Courts, however, are reluctant to invalidate a non-compete agreement based upon one party’s subjective interpretation of the contractual language.

The courts “will not torture words to import ambiguity where the ordinary meaning leaves no room for ambiguity” and have further stated that “any ambiguity in a contract must emanate from the language used in the contract rather than from one party’s subjective perception of the terms.”24 Words and phrases in contracts are given their ordinary, plain meaning and courts will not construe their meaning to favor one party’s interpretation over the other.

Invalidating a Restrictive Covenant

There may be cause to invalidate a restrictive covenant, however, when its provisions transcend mere ambiguity and call into question such essential contractual elements as the identification of parties, dates, and terms. Where multiple versions of an agreement exist and they contain material discrepancies, courts are inclined to conclude that there is insufficient evidence to support even a “probable cause finding of a bona fide agreement. . . .”

Parties have sometimes tried to assert that a particular restrictive covenant is invalid and unenforceable because the party failed to completely and/or thoroughly read the document before signing. This is not a valid defense and courts have consistently held that “the failure to read a contract before signing it in no way diminishes its binding force.”

A party, absent proof of accident, fraud, mistake, or unfair dealing, cannot escape contractual obligations by asserting that he failed to read the provisions contained in the contract he signed and entered into with the other party. Simply put, failure to read a contract does not in any way diminish the enforceability of its respective contractual obligations as allocated to the parties.

D. Mootness

Close attention must be paid to the period of time specified in the non-compete agreement as this will likely determine the applicable period of enforcement for the agreement’s provisions. Courts can only enforce the provisions of a non-compete agreement in accordance with its contractually agreed upon temporal limit. Various states approach this issue differently and have established divergent policies regarding whether to extend the duration of a non-compete agreement in order to provide a remedy for a contractual breach.

Some jurisdictions, following a Florida Supreme Court decision, have permitted courts to exercise “broad equitable power to extend even an expired restrictive covenant as a remedy for breach.” Connecticut courts have thus far refused to apply this expansive standard to extend a restrictive covenant’s duration when applying Connecticut law.

Connecticut state law renders moot a request for enforcement of a non-compete upon the expiration of the time limitation specified in the agreement. It should be noted, however, that some non-compete provisions by their terms extend the operative period for the same amount of time as an employee has been shown to be in breach.

Our employment law firm in Westport Connecticut serves clients with discrimination, non-compete, and general labor law issues from all over the state including the towns of: Bethel, Bridgeport, Brookfield, Danbury, Darien, Easton, Fairfield, Greenwich, Monroe, New Canaan, New Fairfield, Newton, Norwalk, Redding, Ridgefield, Shelton, Sherman, Stamford, Stratford, Trumbull, Weston, Westport, and Wilton. We have the best employment and labor law attorneys in CT on staff that can help with your Connecticut or New York education issues today.

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