Labor & Employment Law

Enforceable Noncompete Agreements: Is At-Will Employment Really "Illusory"?

By Robert Wood, David Ellis, and James Landon

Texas courts routinely hold that at-will employment is "illusory" consideration.  Because the employer is free to terminate the employee at any time, the courts reason, giving an at-will job to someone is, legally speaking, meaningless.  Thus, non-compete agreements in Texas based upon that consideration are unenforceable.

Not all states agree.  While researching a noncompete matter in Illinois the other day, I came across this passage from a case there:

To be enforceable, a covenant not to compete must be ancillary to either a transaction (an otherwise valid contract), or a valid relationship.  Although an at-will employment agreement, whether written or oral, might not be considered "enforceable" in the strictest sense of the term, it is nonetheless an agreement and relationship with numerous legal consequences, imposing rights and obligation son both parties.  Therefore, a noncompetition covenant entered into by an at-will employee, whether the employee is employed under a written or oral agreement, complies with the requirement of ancillarity.  This is because a covenant in such a situation is not a "naked" restraint on trade, but instead is merely ancillary to the primary purpose of the relationship: an employer-employee relationship.  Thus, noncompetition covenants occurring in at at-will employment relationship are not enforceable per se.

According to this court, hiring an at-will employee subjects an employer to potential legal risk.  For example, the employee, even though she is at-will, is entitled to all protections under Title VII, the ADA, the ADEA, workers' compensation laws, the FMLA, and other laws.   The Illinois court held that at-will employment, therefore, is good consideration, not "illusory" consideration.  Although Texas courts disagree, it's interesting to examine foreign law holding otherwise.

Full post as published by Texas Non-Compete Law Blog on July 16, 2007 (boomark / email).