Under Minnesota law, an employer does not need to give an employee separate consideration for signing a non-compete agreement provided it is signed at the “inception” of the employment relationship. A non-compete signed by an employee on her first day of work would seem to satisfy this requirement.

The Minnesota Court of Appeals however, recently affirmed[1] a district court’s invalidation of a one-year non-compete agreement signed on the first day of work for lack of independent consideration. According to the court, the inception of the employment relationship occurred when the employee accepted the job offer a week earlier during the job interview, thus requiring the employer to provide her independent consideration to sign the non-compete agreement on her first day in order to render it valid and enforceable.

Background

In 2003, Joan Stier interviewed for a part-time position with Safety Center. The next day, Safety Center sent Stier a letter which stated, “[t]his is to confirm your acceptance of the position we offered you,” and set out the terms of her employment, including Stier’s hourly wage, at-will employment status, and her start date. The letter made no mention of a non-compete.

When Stier arrived to work a week later as directed by the letter, she was asked to fill out new-hire paperwork and sign a one-year non-compete agreement that limited her ability to “provide services to Safety Center’s clients in any competitive capacity,” along with related one-year limitations on disclosure and confidentiality. Stier executed the non-compete agreement without objection.

Stier’s employment eventually transitioned from part-time employee to Safety Center’s program director. After nearly 12 years of employment, Stier resigned from Safety Center and began working as program director for her newly-established competing company. Safety Center sued, claiming, among other things, Stier’s actions violated the non-compete agreement.

In a bifurcated trial to resolve the issue of whether the non-compete agreement was enforceable, the district court found that the non-compete agreement was executed after rather than ancillary to the employment agreement. The district court also found that, because Safety Center offered no evidence that new consideration was provided to Stier in exchange for executing the subsequent non-compete agreement, the non-compete agreement was not enforceable.

The Court of Appeals’ Decision

On appeal, the Minnesota Court of Appeals affirmed the district court’s findings. The court began its analysis by confirming that, under Minnesota law, a non-compete agreement must be ancillary to an employment agreement or accompanied by independent consideration to be enforceable. While Minnesota law does not require additional consideration for a non-compete agreement if it is executed at the very outset or “inception” of the employment relationship, independent consideration must be provided where a non-compete agreement is presented after entering into an employment agreement in order to render it enforceable.

The court then explained that the record supports the district court’s finding that the parties assented to the employment relationship prior to Stier’s being informed of or presented with the non-compete agreement. Focusing on the language and circumstances surrounding Safety Center’s letter to Stier, the court held the district court did not err in finding the existence of a contract for employment by inference due to the “unambiguous” and “explicit” language in the letter confirming acceptance of offered employment.

According to the court, because Stier accepted the job offer at the end of her interview and was not presented with or notified of the non-compete agreement until after the beginning of the employment relationship – even if it was the first day of work – the non-compete agreement was not ancillary and required independent consideration. Safety Center offered no evidence of providing independent consideration to support the non-compete agreement during the district court case and, consequently, the non-compete agreement was affirmed as unenforceable.

Take-Away

The Safety Center decision highlights that courts will closely analyze the language and circumstances of initial job offers and any accompanying communications in order to determine at which point the parties entered into a binding employment relationship. Minnesota employers should take care to clearly indicate to new employees that they are expected to sign an employment agreement and/or restrictive covenant as a condition of employment in order to avoid confusion and potential future litigation.

[1] See Safety Center, Inc. v. Stier, et al., No. 55-CV-15-5304 (Min. Ct. App. Nov. 6, 2017).