Are non-competition agreements enforceable against an employee who was fired?
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UPDATED: Feb 20, 2013
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In theory, there could be a non-competition agreement that would be enforceable when the employer terminates the employee. In practice, such would only be the case when there is some additional compensation, like a severance package (which the company was not otherwise obligated to give) or the proceeds from having bought a business from the employee.
The reason is that a non-competition agreement is a contract. A contract requires consideration on both sides. This means is a contract is an agreed-to exchange of benefits, in which each side “gets something.” If there is no consideration, then there is no enforceable contract.
Typically, when employers have their employees sign non-compete agreements, the consideration is employment. The employee gets to have or keep a job in exchange for signing the agreement, since if the employee doesn’t sign the agreement, he or she can be fired. If the company terminates the employee or rescinds its employment offer because the non-compete agreement was not signed, the consideration is negated and there is no enforceable contract.
If there is independent consideration for the agreement—something other than the job itself—though, that’s another story. For example, if a company offers to give someone six months’ salary as severance if she signs a non-competition agreement, that agreement would be enforceable. Six months salary is more than adequate consideration to support an otherwise enforceable non-competition agreement.
Or consider the example of someone selling his or her company to a larger company. The person stays on through the sale as an executive, but as part of the sale, signed a non-competition agreement. Because the non-competition was part of the sale of her company, she received the proceeds of the sale as consideration. The agreement could be enforced even after she was later terminated by the new company.
If the only consideration for a non-competition was being allowed to work, it’s probably not enforceable after being terminated. If some other value was provided in exchange for signing the agreement, such as severance pay or proceeds from a sale, the agreement would be enforceable, even if the employee is later terminated.