When is a Minnesota Non-Compete Agreement Supported by Consideration?

If a Minnesota employer wants an employee to sign a non-compete agreement or other restrictive covenant, the employer should follow a few simple steps to increase the chance that the non-compete agreement will be enforceable under Minnesota law.

Under Minnesota law, non-compete agreements must be supported by “consideration.”  Consideration is a legal term of art and means that the employer must provide the employee with something of value in exchange for signing the non-compete agreement.  Sometimes, the value provided is a job offer.  In other cases, the employer might provide something else such as a bonus, raise, or stock options.

Under Minnesota law, the job offer can serve as the consideration for a non-compete agreement if the employer requires the job applicant to sign the non-compete agreement as part of the initial job offer, and the employer actually provides the applicant with a copy of the agreement at the time of the job offer.  In most other cases, such as when the employee has already accepted a job offer or started working, the employer will be required to provide the employee with “independent consideration” beyond continuation of the employment relationship, such as a promotion, raise, bonus, incentive, stock options, specialized training, access to confidential information, or other significant benefit. 

These requirements reflect the fact that non-compete agreements are generally disfavored under the law because they decrease competition in the marketplace and restrict an employee’s right to work and ability to earn a livelihood.  Minnesota courts want to make sure that employers do not take unfair advantage of employees with the use of non-compete agreements given the unequal bargaining power between employers and employees and the anti-competitive nature of such agreements.

Requiring a Non-Compete With the Initial Job Offer: 

When hiring a new employee, most employers would prefer to obtain the employee’s signed non-compete agreement in exchange for offering the position without the need for providing a specific signing bonus or other payment.  In order to avoid the need for giving a special payment in exchange for the non-compete agreement, the employer typically must provide the job applicant with a copy of the non-compete agreement along with the initial job offer.  In most cases, it is not sufficient to merely notify the job applicant that a non-compete agreement will be required upon hire.  In order to prevent the employer from taking unfair advantage of unequal bargaining power, Minnesota courts generally require the employer to show the non-compete agreement to the employee, so the employee can review it before accepting the job offer or resigning another position.

One of the most frequently contested issues in Minnesota non-compete litigation is whether the employer actually presented the non-compete agreement to the employee as part of the initial job offer.  By the time the employer needs to enforce the agreement, many years may have passed, memories may be fuzzy, and the individuals who hired the employee may not work for the company any longer or may not be available to testify.  For that reason, it is essential that the employer carefully document that the employee received a copy of the non-compete agreement along with the initial job offer.  Minnesota employers should attempt to follow these steps:

• If possible, disclose the fact that a non-compete agreement will be required in the initial job posting and/or job application.  Retain a copy of the job posting and/or job application. 

• Verbally notify candidates that a non-compete agreement will be required during the interview process.  Keep contemporaneous written notes that such disclosure was made. 

• Refrain from making a verbal job offer.  Rather, following the interview, notify the job applicant that they will likely receive a written job offer outlining the terms of the offer. 

• Provide the candidate with a formal written job offer that clearly states the employee must sign a non-compete agreement as a condition of being hired.

• Attach a copy of the non-compete agreement to the written job offer. 

• Include the following language in an “acceptance” line at the bottom of the job offer:  “I hereby accept the terms of the job offer described above, including all of the terms of the attached non-compete agreement, which I also agree to sign and return to the company.”

• Insist that the employee sign, date, and return the non-compete agreement to the company before starting work.  Delay the employee’s starting date until this occurs.

• If possible, have an independent person witness the employee’s signature, and then have the witness sign and date the non-compete agreement.  In the alternative, consider requiring the employee to have the signed non-compete agreement notarized by a notary public.

• Keep paper copies of the offer letter and non-compete agreement in the employee’s personnel file.  Keep duplicate copies in at least one other location, scan the documents as a PDF or other digital file, save the PDF to the employer’s computer server, and keep a secure electronic backup in at least one other location. 

• If the non-compete agreement is received before the employee’s first day of work, send an e-mail to the employee acknowledging receipt of the non-compete agreement and attach a scanned copy (e.g., PDF file).  The e-mail will be time stamped and provide useful evidence that the non-compete agreement was truly received before the employee commenced employment. 

• If possible, have the hiring manager or Human Resources Director type a memo to the file (or e-mail) indicating the exact date and time the signed non-compete agreement was received.

Requiring a Non-Compete Following an Informal Job Offer:

In some cases, the employer might inadvertently offer a position to a job applicant without notifying the applicant of the non-compete agreement or providing a copy of the agreement to the applicant.  This typically occurs because the employer is unfamiliar with Minnesota law, or the hiring manager is not properly trained to extend job offers only in writing through a formal offer letter along with a copy of the non-compete agreement.  If this has occurred, it is imperative that the employer cure the defect as soon as possible.  Typically, this means that the employer should extend a formal revised written job offer, state that the formal offer supersedes all prior offers, attach a copy of the required non-compete agreement, and provide the employee with a meaningful signing bonus, higher hourly rate or salary than originally offered, extra vacation days, or something else of significance specifically in exchange for signing the non-compete agreement.  While there is no definitive rule about what is sufficient, the courts have stated that the additional consideration must be bargained for and provide real advantages.

In order to make it clear that the employee is receiving “independent consideration” that was not bargained for at the time of the original “informal” offer, the employer should document in the written offer letter and/or the body of the non-compete agreement exactly what the employee is receiving in exchange for signing the non-compete agreement (beyond what was originally promised).

Requiring a Non-Compete From a Current Employee:

Under Minnesota law, employers typically cannot require current employees to sign a non-compete agreement without providing “independent consideration.”  Examples of independent consideration generally include a bonus, promotion, raise of salary or hourly wage, access to confidential information, stock options, substantial training, or cash payments.  Independent consideration might also come in the form of a formal written employment agreement under which the employee receives job security (e.g., converting from an “at will” employment relationship to one in which the employee can be terminated only “for cause”), additional employee benefits, or a guaranteed severance package if the employee is eventually laid off or terminated without cause.  The independent consideration must provide the employee with real advantages.  In some cases, Minnesota courts have concluded that the consideration provided to the employee (such as a very small bonus) did not provide any real advantages.

In most cases, a non-compete agreement entered into with a current employee must also be bargained for.  This generally means that only those employees who sign the non-compete agreement should receive the consideration.  For example, if the employer gives the same raise to all salespersons, regardless of whether they sign the non-compete agreement, then a court may later conclude that the salespersons who signed the agreement did not receive any real advantages in exchange for signing it.

Bargaining can also be evidenced by the fact that the employee requested changes to the non-compete agreement, that the employer modified provisions of the non-compete agreement during negotiations, and/or that the employee asked for more money or consideration and the employer improved its original offer.  Employers should carefully document the history of all negotiations with current employees regarding the terms of a non-compete agreement in order to demonstrate that it was truly bargained for.  As with copies of the non-compete agreement itself, the employer should retain multiple paper and electronic copies of these communications and drafts (e.g., e-mail messages and redlined agreements) in several locations to guard against loss, destruction, or deletion.

Continuation of Employment as Adequate Consideration:

In some circumstances, although not often, Minnesota courts will consider continuation of employment as adequate consideration to support the enforcement of a non-compete agreement.  In order for continued employment to serve as adequate consideration, the non-compete agreement must be bargained for and provide the employee with real advantages.  In practice, the employer typically must show that the employee worked for the company for many years and derived substantial economic and professional benefits directly as a result of signing the non-compete agreement.  

Because Minnesota courts rarely view continued employment as adequate consideration to support the enforcement of a previously signed non-compete agreement, Minnesota employers should routinely audit their non-compete agreements with key personnel to ensure that they were properly supported by consideration at the time they were signed.  If that was not the case, the employer should consider making key raises, bonuses, and/or promotions conditioned on the employee reaffirming his or her obligations under the existing non-compete agreement.  While not fool-proof, this strategy might help cure any problems arising from the lack of consideration when the agreement was originally signed.

Conclusion:

Under Minnesota law, when an employer requires new hires or current employees to sign a non-compete agreement, the employer must generally provide adequate consideration.  At the beginning of the employment relationship, the job itself is generally adequate provided that the employer provides the job applicant with a copy of the non-compete agreement along with the initial job offer. If an employer fails to provide a new hire with a copy of the non-compete agreement before the individual accepts the employment offer, the employer generally must provide the employee with independent consideration or the agreement will be deemed invalid.  Likewise, where an employer requires a current employee to sign a non-compete agreement, the employer ordinarily must provide the employee with independent consideration, such as a promotion, raise, bonus, or other significant benefit.

By following these simple steps, Minnesota employers will help ensure that their non-competition agreements, non-solicitation agreements, non-disclosure agreements, and other restrictive covenants are deemed enforceable by the courts.  While non-compete agreements must also protect a legitimate employer interest and be reasonable in scope, simply ensuring that the employee received fair notice of the terms of the non-compete agreement and something of value in exchange for signing it will go a long way towards ensuring that the employer’s non-compete agreements will pass legal muster.