Employee Non-Competition Agreements

Companies want to employ the most talented workers they can in order to help their businesses thrive. However, they do not want employees to leave with clients or confidential information that can be used to benefit a competitor. Employment agreements may include restrictive covenants to guard against these potential losses. Restrictive employment covenants are clauses in employment contracts or separate contracts that limit an employee’s activity after leaving employment.

There are different types of restrictive employment covenants, including covenants not compete, covenants not to solicit, and confidentiality agreements. Covenants not to compete generally restrict an employee from working for a company that competes with the employer for a certain period of time and within a specific geographic region. Covenants not to solicit generally restrict an employee from diverting customers or recruiting employees to join them in a competing business. Confidentiality agreements prohibit employees from revealing information that the employer has designated as secret.

Enforceability of Restrictive Employment Covenants in Illinois

To be enforceable, restrictive employment covenants must be reasonable. In Illinois, courts regularly refuse to enforce restrictive covenants that are deemed unreasonable.

In order to establish that a non-compete or non-solicitation agreement is reasonable, an employer will need to show that the restrictions: (1) are needed, but no greater than what is needed to protect a legitimate business interest of the employer, (2) do not create an undue hardship for the employee, and (3) do not harm the public. An employer’s legitimate business interests can include, among other things, protection of confidential information, trade secrets, and customer or client relationships. The agreement must also be supported by adequate consideration, sufficient value provided to the employee in exchange for the promise not to compete.

If a court finds that an employer has a legitimate business interest entitled to protection, it will then carefully scrutinize the type of restricted activities, time period, and geographic territory to ensure that the restrictions are no broader than necessary to protect that interest. No particular factor fully determines enforceability. Rather, the court will examine the totality of the circumstances.

Non-solicitation clauses are only enforceable if they are reasonably connected to an employer’s interest in protecting its customer or client relationships. Courts will carefully analyze the nature of both the employer and employee’s relationships with the customers or clients. Courts are less likely to enforce non-solicitation clauses that prohibit employees from providing services to customers or clients with whom they did not have contact during their employment.

Illinois Freedom to Work Act

In 2016, the Illinois legislature passed the Freedom to Work Act (the “Act”), which banned covenants not to compete for low-wage employees. Low-wage employees were defined as employees making the greater of the applicable federal, state, or local minimum wage or thirteen dollars per hour.

On January 1, 2022, several amendments to the Freedom to Work Act took effect. Those amendments codified existing case law, but also imposed significant new limitations on the enforceability of covenants not to compete and covenants not to solicit that are ancillary to employment agreements. Under the amended Act, employers may not enter into covenants not to compete with employees who earn seventy-five thousand dollars per year or less. Employers are also be barred from entering into covenants not to solicit with employees who earn forty-five thousand dollars per year or less. The salary thresholds will increase every five years for the next fifteen years. Any covenant not to compete or not to solicit entered into after January 1, 2022 by an employee who earns less than the applicable threshold is unenforceable.

The amendments also codify key principles of Illinois case law regarding the enforceability of covenants not to compete. Those principles are: (1) the employee must receive adequate consideration, (2) the covenant must be ancillary to a valid employment relationship, (3) the covenant must be no greater than is required for the protection of a legitimate business interest of the employer, (4) the covenant must not impose undue hardship on the employee, and (5) the covenant cannot be injurious to the public.

With regard to the legitimacy of the employer’s business interest, the amended Act lists several non-exclusive factors that may be considered.  Those factors are: the employee’s exposure to the employer’s customer relationships or other employees, the near-permanence of customer relationships, the employee’s acquisition, use, or knowledge of confidential information through the employee’s employment, the time restrictions, the place restrictions, and the scope of the activity restrictions.  However, the amended Act provides that these factors are are only non-conclusive aids in determining the employer’s legitimate business interest and that, consistent with Illinois case law, the issue of the legitimacy of the employer’s interest must be resolved by an examination of the totality of the circumstances.  Therefore, a covenant not to compete or solicit that may be reasonable under one set of circumstances may be unreasonable and, therefore, invalid under a different set of circumstances.

A new development in the law of restrictive employment covenants introduced by the amended Act is a provision designed to ensure that employees are informed about their obligations under the covenant.  The amended Act provides that a covenant not to compete or a covenant not to solicit is illegal and void unless (1) the employer advises the employee in writing to consult with an attorney before entering into the covenant and (2) the employer provides the employee with a copy of the covenant at least fourteen calendar days before the commencement of the employee’s employment or the employer provides the employee with at least fourteen calendar days to review the covenant.  However, if the employee voluntarily elects to sign the covenant before the expiration of the fourteen day period, the employer will still be in compliance.

Another new development introduced by the amendments is a provision that, in any civil action or arbitration filed by an employer to enforce a covenant not to compete or not to solicit, if the employee prevails, the employee will be entitled to recover all reasonable attorneys’ fees and costs regarding the claim.

Case law regarding restrictive covenants is also constantly evolving. It is, therefore, critical to consult a lawyer knowledgeable about the current law regarding restrictive employment covenants to discuss your particular situation.

Litigating Disputes Arising Out of Restrictive Employment Covenants

Disputes arising out of restrictive employment covenants usually end up in court when an employee has left a company and either formed a competing business or joined an existing competitor. In those situations, employers are often concerned that the former employee will divert customers and use the employer’s confidential information to benefit the competitor. Employees are often concerned about their ability to earn a living within a particular industry.

A company concerned that a former employee will harm its business through activity that would violate a non-compete or non-solicitation agreement has the right to seek an injunction. The employee will then have the right to defend against that action by, among other things, demonstrating that the agreement is unreasonable. Employees who wish to accept a new position or start a new business that may cause them to violate a restrictive covenant also have the right to file an action requesting that a court issue a declaratory judgment finding the agreement unenforceable.

Courts will scrutinize non-compete and non-solicitation agreements very closely to ensure that they are not overbroad, are limited to protecting the employer’s legitimate business interests, do not create an undue hardship for the employee, and are not harmful to the public. The focus will often be on the particular company and its relationships with its customers, the specific industry in which the business operates, the employee’s relationship with the customers, and the type of information about the business and its customers that the employee gained while employed by the company.

At Neschis & Tolitano, we litigate disputes arising out of non-compete and non-solicitation agreements on behalf of both employers faced with harm from competition by former employees as well as on behalf of employees who may wish to seek new employment or start their own business but may be hindered in those efforts by a restrictive employment covenant. Our primary objective in all litigation is to protect our clients’ legal and business interests. Whenever possible, we explore a negotiated resolution or alternative means of dispute resolution. However, we recognize that there are disputes that can only be resolved through litigation. Because we are experienced in litigating non-competition disputes, we are able to assert and protect our clients’ interests.