Hiring Is Tough but Don’t Waive Restrictive Covenants

Brian Bouchard | July 14, 2021

Hiring. It’s easily the most significant challenge facing almost every company as we eek away from a pandemic economy. Businesses are having difficulty recruiting and keeping talent in almost every profession, field, and position.

To increase their visibility and the odds of landing that top-tier candidate, many businesses have started offering generous incentives to new hires. Full-relocation packages, housing, extra-vacation, and garish signing bonuses are now normal. Legally speaking, incentive packages like those are generally fine, although every business should have a qualified employment and compensation attorney review the fine print to avoid unintended consequences. Through the grapevine, I’ve heard that other companies have been more aggressive in the recruiting process by agreeing to waive key employment covenants like noncompetes and nonsolicits. This practice—like new homebuyers waiving all inspections—makes my head hurt a little.

Businesses generally get only one shot at creating an enforceable employment covenant, and it’s at the time of hire. New Hampshire law, for example, requires noncompetes for new employees to be disclosed “prior to the employee’s acceptance of an offer of employment.” This means that a business cannot temporarily “suspend” noncompetes during a strained labor market and then reintroduce them later. Neighboring states have like restrictions that make introducing a noncompete during employment cumbersome, if not impossible.

For other types of covenants, like nonsolicits, intellectual property agreements, and arbitration agreements—to name just a few—questions of consideration may arise when they are not disclosed prior to employment. Employment contracts generally rely on the new employment opportunity as consideration for the contract (i.e., the bargained-for exchange needed to support an enforceable contract). The dynamic changes when these contracts are introduced mid-job. In that situation, “continued employment” would need to qualify as adequate consideration; otherwise the business will need to offer something more, like a bonus or extra PTO to support the contract.

Introducing a contract mid-job also raises questions of coercion. It’s one thing to say that a restrictive covenant is required to join a company; it’s another thing to say that acquiescence to the covenant is required for someone to keep their job. The presentation and power imbalance may create problems when the business attempts to enforce the covenant.

Finally, consistency matters when it comes to restrictive covenants. Some covenants are enforceable only to protect a business’s goodwill and propriety interests. What message is a business sending by requiring noncompetes for years only to not require them when the labor market tightens? Are the covenants truly needed to protect a business’s goodwill? Pressing pause, in other words, may jeopardize enforcement of both past and future noncompetes.

Hiring is tough right now, no question about it. But instituting a temporary pause on employment covenants to land the ideal candidate may be more trouble than it’s worth and may spell long-term problems for the business.

There may be legitimate reasons to forego certain employment covenants altogether, as there is not a uniform approach to employee mobility that fits every business. Those decisions, however, should not be made in the moment and should involve qualified employment and compensation counsel.

This article was originally published by the Portsmouth Chamber of Commerce and can be found here.