Non-Compete Agreements With At-Will Employees
The Illinois Appellate Court recently issued a decision changing a fundamental aspect of the law on non-compete agreements in Illinois—which may cast doubt on the enforceability of non-compete agreements your company has put in place with new employees in the last two years.
Prior to the court’s decision, Illinois law allowed an employer to enforce a reasonable non-compete agreement with a new, at-will employee as long as it was signed before employment started. Under that case law, the offer of employment alone was considered sufficient “consideration” for the non-compete agreement. If, on the other hand, an employer wanted a current employee to sign a non-compete, then courts required fresh consideration (otherwise the employment would have to continue for a “substantial period” to be enforceable).
In the new decision, however, the court abandoned the old rule that signing a non-compete agreement prior to employment was sufficient consideration. The court found that a non-compete signed as a condition of employment could not be enforced against an employee who resigned 3 months later because that “period of time is far short of the two years required for adequate consideration under Illinois law.”
But is the court really saying that no restrictive covenant will ever be enforced unless a new employee remains employed for two years? That conclusion seems unreasonable because it could chill new hiring, as employers requiring protection would be wary of guaranteeing employment for untested employees. Unfortunately, it will take some time before courts have an opportunity to further interpret the new state of affairs in Illinois non-compete law.
In the meantime, the way to harmonize this new decision with the prior rulings is to conclude that Illinois courts will enforce non-competes against new hires so long as an the employer provides fresh consideration (independent of hiring) similar to how it would with existing employees. Of course, there still remains some doubt as to what other form of consideration will be deemed sufficient, but only time will tell as more restrictive covenants are challenged.
Therefore, we are advising employers who have a non-compete agreement(s) with an at-will employee(s) which was signed as a condition of taking the job and which employee has less than two years of service to evaluate their options. The safest option to enhance enforceability of such non-compete agreements is to provide additional consideration to the affected employee(s) now. Examples of such additional consideration include: a one-time cash bonus; a deferred compensation arrangement; a stock award; a raise; a change to the employee’s employment status (to a specific term, the opposite of at-will employment); or, perhaps, an offer to make the restrictive covenant inoperable if the employee is terminated without cause during the first two years after the agreement is signed. We recommend documenting the new consideration in either a written amendment to the original non-compete agreement or provide for a new written agreement. The other option, particularly if the affected employee has been employed for almost two years, is to do nothing and allow that two year period to run its course.
Gould & Ratner LLP strongly recommends that you review your existing non-compete agreements and then call the firm’s lawyer with whom you regularly work, David N. Michael or Mark D. Brookstein, to discuss your organization’s options.