Employment contracts are one area where Montesino Law helps entrepreneurs protect their business interests. We’ve written the following brief summary to give potential clients an idea of the issues involved. Please note that this summary is for informational purposes only and should not be relied on as legal advice (full disclaimer available here).
Employment contracts are not mandatory in the United States. In the United States, employment is generally “at will.” Under at will employment the relationship can be ended at any time and for any reason (as long as that reason is not one that is prohibited by law such as discrimination on the basis of a protected class). However, employers will sometimes opt to have an employment contract in order to protect their business interests through the use of restrictive covenants.
Contract Formation Generally
Employment contracts are governed by the same principles that govern the formation of contracts generally; there must be offer, acceptance, and consideration. Offer and acceptance tend to happen naturally in the creation and signing of a written agreement, but consideration can easily be overlooked in the drafting of an employment agreement (barring an enforceable contract from ever being formed).
Employment contracts, like all other contracts, must be backed by consideration. Consideration is something of value that is exchanged by each party in return for performance (or a promise of performance) by the other party.
Courts do not generally inquire into whether consideration is sufficient. However, some courts have failed to find consideration when the agreement was entered into after employment had begun and there was no change in the terms of the employment. If an employer would like to have a current employee enter into an employment contract, there should be a favorable change in the employee’s status (e.g., a raise and/or promotion).
Consideration is easier to find when dealing with a new employee. At will employment at a specified rate can be consideration for an employment contract when dealing with a new employee.
Use of Restrictive Covenants in Employment Contracts
Restrictive covenants offer the employer some assurance that the employee will not compete directly with the employer’s business, in the event that they leave the business. Three common types of restrictive covenants used in employment contracts are non-compete clauses, non-solicitation agreements, and confidentiality agreements.
The “Non-compete” clause or “covenant not to compete” (CNC) is the most prohibitive type of restrictive covenant applicable to employment contracts. Employers often attempt to impose strict CNCs, yet these CNCs must meet onerous legal standards in order for a court to enforce them. These restrictions on former employees usually provide for a time period in which the former employee may not seek certain types of employment that are related to the former employer’s business. In addition to this restricted period of time, the non-compete clauses often include limitations on where the former employee can work geographically and in which industries a former employee can seek employment in. In theory, these restrictions prevent a former employee from using their intimate knowledge of the employer’s business to the advantage of a close competitor of the employer.
While an employer could write heavily restrictive non-compete clauses into its employment contracts, courts generally disfavor strict non-compete clauses. This means that employers could attempt to implement harsh CNCs, hoping to intimidate uninformed employees into adhering to the language of the clause, yet, if an employee challenges the clause in court, it will likely be voided. This is because courts seek to balance the interests of the employee, employer, and the economy as a whole.
Courts lend great weight to the premise that a person’s right to earn a living and seek employment should not be unreasonably limited. In theory, an unreasonable limitation would also be bad for the economy and industry in general. This is because widespread usage of restrictive CNCs would leave people, who have gained valuable experience in a certain industry, unable to seek further employment in that industry. Essentially, enforceable strict CNCs would lock employees in their current jobs or leave them looking for entirely unrelated employment. In fact, certain states, like California, have used this reasoning to mostly outlaw non-compete clauses altogether. Cal. Bus. & Prof. Code 16600. However, a majority of state court systems also recognize that employers often have valid business reasons to seek the enforcement of CNCs. Thus, a compromise usually comes in the form of courts allowing reasonable CNCs to accommodate the concerns of the employer, while voiding CNCs that are unreasonably restrictive to the employee’s freedom to seek new employment.
An example of this majority approach would be Florida. Florida deals with covenants not to compete in section 542.355, Florida Statutes, which provides “enforcement of contracts that restrict or prohibit competition during or after the term of restrictive covenants, so long as such contracts are reasonable in time, area, and line of business, is not prohibited.” In other words, CNCs that provide for reasonable time, area and line of business, restrictions will be found to be valid in the state of Florida. Additionally, the statute provides that the covenant not to compete must be set forth in writing and that all restrictions contained within the CNC must be motivated by a legitimate business interest. Fla. Stat. §§ 542.335(1)(a)-(b). The statute lists legitimate business interests that are approved under the statute and states, however, that this is not an exhaustive list of legitimate business interests. Fla. Stat. § 542.335(1)(b).
If an employer can show a legitimate business interest behind the restrictions imposed on the employee through the CNC, yet an employee is able to show that the restrictions imposed by the CNC are unreasonable, the court will use its statutory authority to lessen the restriction imposed by the CNC to make it reasonable under the circumstances. Fla. Stat. § 542.335(1)(c). The Florida statute specifies different presumptions of reasonableness on restrictions between people in certain business relationships, including former employees, agents, independent contractors, distributors, dealers, franchisee’s, etc. Fla. Stat. § 542.335(1)(d). As for a CNC to be enforced against a former employee, agent or independent contractor, the statute provides that “a court shall presume reasonable in time any restraint 6 months or less in duration and shall presume unreasonable in time any restraint more than two years in duration.” Fla. Stat. § 542.335(1)(d). However, as previously stated, a restriction found to be justified with a legitimate business interest, yet containing an unreasonable time restraint, will merely be modified to a period that is presumed reasonable under the circumstances and not voided in its entirety.
One legitimate business interest, which courts routinely recognize is “the right to prohibit the direct solicitation of existing customers’ [for example] . . . when a former employee directly solicits customers of his former employer.” Dyer v. Pioneer Concepts, Inc., 667 So. 2d 961, 964 (Fla. 2d DCA 1996). This prohibition of a direct solicitation of an employer’s customers by a former employee is called a non-solicitation clause or agreement (NS) and it is codified in Florida under section 542.335(1)(b)3, Florida Statutes. A NS clause can be incorporated within a broader non-compete agreement or it can be made independently. Courts are much more relaxed with regards to the enforcement of non-solicitation clauses because NS clauses do not put any limitations on where the former employee can work after departing from the business. Furthermore, since NS clauses are held to always be protecting a legitimate business interest (as applied to current clients of the employer), they do not require the employer to carry any burden of proof in the court to show the validity of the business interest; non-solicitation clauses relating to former clients of the employer require further inquiry into whether there is a legitimate business interest. Thus, it is almost always a sound business decision for an employer to have employees sign non-solicitation agreements.
Confidentiality agreements, like non-solicitation agreements, are also explicitly recognized as being justified by a legitimate business interest under section 542.335(1)(b), Florida Statues. This section states that the “term legitimate business interest includes…valuable confidential business or professional information that otherwise does not qualify as trade secrets.” Fla. Stat. § 542.335(1)(b). This language acts as a catchall that works to protect other valuable business information that would not meet the legal definition of a trade secret. As the District Court of Appeal of Florida, Second District, described, “parties are entitled to enter into contracts in which they agree not to use or disclose confidential information, even though the information may not qualify as a trade secret in a legal sense.” Concept, Inc. v. Thermotemp, Inc. 553 So. 2d 1325, 1327 (Fla. 2d DCA 1989). The court further held that, so long as the confidentiality agreement does not violate any established public policy, the parties should be able to enforce the injunctive provisions of the contract. Id. However, trade secrets are also protected as a legitimate business interest and are defined as:
[I]nformation, including a formula pattern, compilation, program, device, method, technique or process that: (a) derives independent economic value, actual or potential, from not being generally known to and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
§ 688.002(4)(a)-(b), Fla. Stat.
Again, like non-solicitation agreements, courts are not hesitant to enforce confidentiality agreements, as they do not limit a former employee’s freedom to seek new employment in anyway.
In conclusion, a trio of restrictive covenants is often the best method of protecting business interests. Firstly, non-solicitation agreements and confidentiality agreements should always be drafted into Floridian employment contracts, as they will almost always be upheld. Next, an employer should attempt to include a well drafted covenant not to compete. This covenant not to compete should be carefully drafted, so as to protect demonstrable legitimate business interests in a way that is not unreasonable to the discharged employee. If this is done properly, in a majority of states, the covenant not to compete will be upheld.