Here’s one where the tables were turned. Former employees often argue that a non-compete agreement is unenforceable because there was inadequate “consideration.” Consideration is the exchange parties to a contract make, what one side gives to the other that makes the contract binding. Consideration can be in the form of a promise for a promise, money for services or goods or some other thing of value the parties exchange.
When a former employee says there was inadequate consideration, he is saying he did not receive anything of value in exchange for his agreement to not compete with his former employer. In Tennessee, the employee almost always loses that argument. In Tennessee, as in many other jurisdictions, the fact that the employer continued to employ the employee is sufficient consideration or value to the employee to enforce the non-compete agreement.
It turns out that continued employment can also be used against the employer. In a recent case, the Tennessee Ct. of Appeals held that the fact the employee continued to work for the employer was sufficient consideration, or value to employer, to enforce a severance agreement.
The employee Hensley v. Cocke Farmer’s Cooperative had worked for his employer for 28 years when, in 2010, when he signed a severance agreement. The severance agreement was effective until August 2024 and provided the employer agreed would pay the equivalent of the employee’s current salary and monthly health insurance premiums from the date of termination until August 2024. The only exception was if the employee was terminated as a result of death, merger, disability or “for cause,” which meant criminal acts related to the company or shareholders which led to a conviction.
Several months after the employee signed the severance agreement, the employer’s board terminated him “without cause.” Facing responsibility for several hundred thousand dollars in severance benefits, the employer refused to pay.
After finding that the severance agreement was clear, definite, unambiguous, and not difficult to understand, the court looked at whether there was adequate consideration supporting the agreement.
Up to this point, there had been no Tennessee case addressing what constitutes a sufficient exchange of value between an employer and employee to support a severance agreement. But, the court found that severance agreements were analogous to non-compete agreements, and Tennessee law is clear that continued employment is sufficient consideration to enforce the non-compete. The twist is that it is the employee’s agreement to continue working for the employer, not the employer’s agreement to continue employing the employee, that supports enforcing a severance agreement.
Because the employee in Hensley agreed to continue working for the employer, the employer was liable for $380,236.21 in accrued severance benefits and $6,125 per month for the employee’s health insurance premiums.
It is clear that the employer experienced buyer’s remorse, believing it had made a bad deal with the employee. However, as the court stated, “contract law in Tennessee plainly reflects the public policy allowing competent parties to strike their own bargains… Accordingly, the courts do not concern themselves with the wisdom and folly of a contract, and will not relieve a party of its contractual obligations simply because the contract later proves to be burdensome or unwise.”
While this rule does not always hold to be true, as there are many instances where Tennessee courts will modify or refuse enforce a contract, in this case, the court chose to enforce the severance agreement as written.
Attorneys who practice in the field of commercial contracts and employment related matters would have predicted this result. Sophisticated parties are presumed to be competent enough negotiate their own contracts. What’s interesting about this case is the continued-employment argument, which is usually used against the employee in a non-compete context, was used against the employer in the severance agreement context.