Frequently Asked Employment Law Questions - Non-competition and non-solicitation agreements
Non-competition agreements, or covenants to not compete, are components of employment contracts, or entire agreements, that restrict an employee from working for a competitor of his or her employer, or otherwise competing against the employer, during and for a certain time period after their employment.
Non-solicitation agreements, or covenants to not solicit, are components of employment contracts, or entire agreements, that restrict an employee from soliciting the customers, clients, or employees of his or her employer for a certain time period after their employment.
Non-competition and non-solicitation agreements are often interchangeably referred to as “restrictive covenants.”
Whether a non-competition or non-solicitation agreement is valid and enforceable under Illinois law depends upon the specific terms of the agreement, as well as the unique facts and circumstances surrounding the agreement, employment, separation of employment, and post-employment employee conduct.
Adequate Consideration: The first question is whether adequate consideration exists to support a restrictive covenant. Consideration is something of value given in exchange for an agreement. Continued employment may constitute adequate consideration, but Illinois appellate courts have held that employment for fewer than two years is insufficient. Federal courts are not required to follow the “two-year rule.” Other types of consideration do not depend on the length of employment, such as special bonuses, payments, or employee benefits to which an employee would otherwise not be entitled.
Three-Prong Test: Illinois courts apply a three-prong test to determine whether a non-competition or non-solicitation agreement is enforceable. A restrictive covenant, assuming it is ancillary to a valid employment relationship, is reasonable and enforceable only if the covenant:
- is necessary, but no greater than required, for the protection of a legitimate business interest of an employer;
- does not impose an undue hardship on the employee; and
- does not injure the public.
Protectable Business Interests: These include, but are not limited to, customer relationships, confidential information, and trade secrets. Courts consider a variety of factors, such as the near-permanence of customer relationships, whether the employee acquired confidential information through his or her employment, as well as time and place restrictions. No single factor is determinative or carries more weight than another. Whether a legitimate business interest exists is based on the totality of the facts and circumstances of each individual case.
Reasonableness of Time, Place, and Activity Restrictions: In addition, to be enforceable, a restrictive covenant must be reasonable in temporal, geographic, and type of activity scope. There are no bright-line rules to determine reasonableness. Whether a restrictive covenant is reasonable in scope depends on the extent of the restrictions as well as the surrounding circumstances.
Illinois law on the enforceability of restrictive covenants is fluid and, like most employment laws, ever-changing. New legislation that would radically change and codify Illinois non-competition law is pending in the Illinois General Assembly. House Bill 789, if enacted, would:
- provide that non-competition and non-solicitation agreements are invalid and unenforceable for any employee (i) whose annual income is below a certain level, or (ii) who is terminated because of COVID-19-related circumstances;
- require employers to advise employees to consult with their own legal counsel before signing restrictive covenant agreements; and
- make employers liable for attorneys’ fees incurred by employees who prevail in restrictive covenant enforcement litigation.
If House Bill 789 becomes law, Illinois employers should review and revise their restrictive covenant policies and agreements.