Court Strengthens At-Will Employee Restrictive Covenants

An enforceable restrictive covenant (covenant not to compete) protects an employer’s business when an employee leaves the employer to work for a competing business or directly compete with the employer.

A valid covenant prohibits an employee, for a reasonable time and within a reasonable geographic area, from competing with his former employer, including by using proprietary information, trade secrets and/or employer established customer relationships.

A valid restrictive covenant requires “consideration” — the benefit received by the employee for his promise to avoid post-employment competition.

“Consideration” has been a troublesome issue as to existing at-will employees — employees without contracts, who can generally quit or be fired for any reason.

In the past, employers paid these employees substantial sums to comply with the lawful consideration requirement.

In a recent game-changing decision (Runzheimer International, Ltd. v. Freidlen), the Wisconsin Supreme Court expanded the definition of lawful consideration for existing at-will employees.

Under Runzheimer, the employer’s promise of continued at-will employment — its agreement not to immediately fire the employee — alone may constitute lawful consideration.

Runzheimer is an important “win” for employers of existing at-will employees, especially in high mobility industries.

The decision loosens the “consideration” requirement, making it easier for employers to show that an at-will employee received a lawful benefit in exchange for signing a covenant.

Runzheimer decided only that continued employment yields lawful consideration. It did not decide whether that consideration was adequate or whether the covenant itself was reasonable under its facts.

Employers wanting to take advantage of Runzheimer should document in the covenant that continued at-will employment constitutes consideration.

Employers should also act consistently as to all current at-will employees asked to sign a covenant.

Finally, employers should retain an at-will employee for at least a reasonable time after the employee signs the covenant.

Otherwise, the employee may claim that the “consideration” — continued employment — was promised in bad faith, or a ruse, or that the covenant was induced by fraud.

Contact your FOS attorney if you have or contemplate restrictive covenants for your employees.