Restrictive covenants in employment agreements are more prevalent in today’s society than ever before. Whether you are a company implementing a non-compete agreement or an employee signing one, it is important to know your rights under the agreement.
When deciding whether a restrictive covenant in an employment agreement is enforceable, Illinois courts conduct a two-tier analysis. First, the court must determine whether the agreement meets the validity requirements. Second, the court must determine whether the agreement is sufficiently reasonable.
With respect to the first tier, the court must make two determinations: (1) whether the restrictive covenant is ancillary to either a valid transaction or a valid relationship; and (2) whether there is adequate consideration to support the covenant. Unless adequate consideration has been given, the restrictive covenant will not be enforced. In the context of non-compete agreements, Illinois courts depart from the traditional rule that the law does not inquire into the adequacy of consideration, only its existence. This departure results from the courts’ recognition that a promise of continued employment may be an illusory benefit where the employment is at will. This is because the employer could terminate the employee the minute after he/she signed the non-compete agreement, and in that scenario the employee would have received no consideration in exchange for signing the agreement.
In an effort to remedy the illusory benefit concerns, Illinois courts have held that continued employment for a substantial period of time beyond the threat of discharge is sufficient consideration to support a restrictive covenant in an employment agreement. But what constitutes a “substantial period of time”? Recent Illinois appellate decisions have held that two years or more of continued employment constitutes adequate consideration. Courts have further held that whether the employee resigned or was terminated has no impact on the court’s analysis. Consistent with the two-year time period, courts have recently held that employment durations of three months and seven months were not sufficient to constitute adequate consideration, thereby rendering the restrictive covenant unenforceable against the employee.
While Illinois courts have generally adopted the two-year time period for the adequate consideration analysis, opponents suggest that imposing such a black-and-white time period actually renders restrictive covenants illusory against the employer. For instance, the dissenting judge in a recent Illinois appellate case noted: “[t]o hold, as the majority does here, that an employee can void the consideration for any restrictive covenant by simply quitting for any reason [within two years] renders all restrictive employment covenants illusory in this state. They would all be voidable at the whim of the employee.” In other words, the employee could sign a non-compete agreement, work for 23 months and then quit for no reason, and the employer would be unable to enforce its non-compete agreement against the employee. Under these circumstances, there is a plausible argument that the employer did not receive any consideration from the non-compete agreement.
After assessing the validity of the restrictive covenant, the court must determine whether the agreement meets the reasonableness requirements. The modern, prevailing common-law standard of reasonableness for employee agreements not to compete applies a three-pronged test. A restrictive covenant is reasonable only if the covenant: (1) is no greater than is required for the protection of a legitimate business interest of the employer-promisee; (2) does not impose undue hardship on the employee-promisor and (3) is not injurious to the public. The extent of the employer’s legitimate business interest may be limited by type of activity, geographical area and time. The reasonableness analysis is conducted on a case-by-case basis, and our attorneys are always available to answer any questions you may have regarding the three factors of the reasonableness test.