Employment Contracts and Non-Compete/ Non-Solicitation Agreements
I have extensive experience reviewing and negotiating employment contracts and non-compete/ non-solicitation agreements (including for jurisdictions in Illinois as well as in most other states - note that I have certain valuable research tools at my fingertips covering this area of the law for Illinois as well as most other states), and have litigated these matters in federal and state courts.
Employment Contracts. Employment contracts are frequently prepared by the employer's attorney, and therefore often contain clauses that disproportionately favor the employer - and that place the employee at a legal disadvantage if problems arise, which can place the employee at financial risk.
- A few examples of this, amongst many, include: absent, vague or one-sided termination of employment "for cause" terms; the absence of a provision providing for you to receive severance if you are terminated not for cause; overreaching non-compete agreements that continue for an unreasonably long period of time and that apply to situations where they should not properly apply; attorney fee clauses; one-sided penalty clauses for alleged violations of the employment contract; and clauses that set the jurisdiction of claims, and the choice of law, in states that are inconvenient for you and/or hostile to employees; etc.
Consulting with me before entering into an employment contract will help return some leverage to you (as well as enable you to better understand your rights, and very possibly enable the employment contract to be revised to be fair/ less one-sided and to better protect your rights and post-employment opportunities). I also may be able to make good practical suggestions, propose strategies, and propose valuable revisions and additions to the not-yet-signed employment contract that can provide additional/better monetary and benefit compensation for you. See, in particular, Executive Compensation.
Once an employment contract has been entered into, I still can advise you concerning the legal ramifications and likely enforceability of particular clauses, as well as provide you with advice regarding your options (including risks, and perhaps opportunities, that you were not aware of) and potential winning strategies. I also can and frequently do provide advice to my clients about how to exit your current Employer, whether or not to inform your current Employer about where you are going, and what to do if your Employer subsequently sends you a cease and desist letter - for each of these issues my advice is dependent on the specific facts of the matter, the law, and good practical considerations that I have honed through my years of experience in this area.
Non-Solicitation/Non-Compete Agreements. In this day and age Employers have greatly expanded the usage and attempted scope of restrictive covenants over what had been done merely 10 - 15 years ago, in an attempt to not merely protect their bona-fide trade secrets and maintain their relationships with longtime customers, but also to improperly overly-severely restrict the post-employment options of their employees - which can negatively affect individuals not just after their employment ends (by potentially reducing post-employment options and post-employment contacts), but also during their employment (by resultantly reducing their bargaining positions).
Restrictive covenants generally fall into three categories: non-solicitation clauses; non-compete clauses; and confidentiality provisions.
- Non-solicitation clauses can restrict you from soliciting: a) employees of the Employer (e.g. - preventing you from attempting to request/ solicit the employees to leave their Employer to join you elsewhere); b) clients of the Employer (judges frequently look closely as to whether such clients of the Employer were "permanent", and other such factors); or c) both a and b.
- Non-compete clauses can restrict you from working in your chosen profession in certain geographic areas, for certain lengths of time (e.g. - for 1-2 years, or longer).
- Confidentiality provisions can restrict you from disclosing particular categories of information that allegedly are secret/confidential, with Employers sometimes attempting to define/use such provisions in an overbroad way to prevent you from rightfully using information/skills that you have obtained during your employment with the Employer in your subsequent employment/ endeavors.
A potential ramification of a restrictive covenant is that you may be precluded from working (not just with or for certain clients, but you may also be precluded from working in your chosen profession) in a certain geographic area (e.g. 5 mile radius, 10 mile radius, Chicago, or even all of Illinois or the entire United States) for anywhere from 6 months to 2 years or more - which may or may not be reasonable under the circumstances.
The Illinois Freedom to Work Act, 820 ILCS 90/1 to 90/99
The Illinois Freedom to Work Act (the “Act”) has recently been amended (effective January 1, 2022) to provide significant protections for both low wage and non-low wage employees - and to alleviate some, but by no means all, of the many burdens/ unwarranted burdens on employees - concerning non-compete/ non-solicitation agreements that are imposed on employees by Employers.
Back in 2017 the Illinois legislature had for the first time enacted the Act to protect “low wage employees” from the trend of Employers over-using non-compete agreements (defined above) to prevent such employees from going out and getting new employment in their same occupational field - which restrictive covenants frequently had the actual purpose/ effect of keeping wages down because such employees were less able to leave their employment and go out in the marketplace to obtain new employment utilizing their most marketable asset (the heard-earned skills that they had acquired and honed through their employment and otherwise).
This law was influenced by the then-recent news - and outrage - of the Illinois-based franchise, Jimmy John’s, having required their sandwich making staff to sign non-compete agreements that provided that such employees were barred from working for any other sandwich shop within two miles - which news also spurred state attorney generals to take action against Jimmy John’s.
The Act - which has now been strengthened - prohibits private Employers of any size from entering into non-competition agreements with “low wage employees”, and declares such agreements to be “illegal and void”. In this regard, in part:
- From on or after January 1, 2017 Employers are prohibited from entering into non-compete agreements with employees earning less than $13.00 per hour;
- From on or after January 1, 2022 Employers are prohibited from entering into non-compete agreements with employees making less than $75,000.00 (with this progressively increasing to $90,000 by 2037); and
- From on or after January 1, 2022 Employers are prohibited from entering into non-solicitation agreements with employees making less than $45,000 (with this progressively increasing to $52,500 by 2037).
Additionally, the Act (as amended) now has certain significant additional protections for all employees (both low wage and non-low wage) going forward (as of January 1, 2022), including in particular:
- Requiring Employers to provide employees with 14-days notice before the employee may be required by the Employer to sign and return the restrictive covenant agreement (thereby affording the employee time to breathe, and to consult with an attorney, and to potentially negotiate better terms or otherwise explore other options). Moreover, if the Employer does not afford the employee such 14-days notice then the restrictive covenant requirement is “illegal and void”.
- Requiring Employers to advise employees in writing to consult with an attorney, else the restrictive covenant requirement is likewise “illegal and void”.
- Codifying case law regarding:
- (a) the “legitimate business test” for determining whether or not the restrictive covenant is overbroad/ unenforceable;
- (b) the Fifield 2-year Rule for determining whether or not there is “Adequate Consideration” for the restrictive covenant agreement; and
- (c) “Blue Penciling”/ reformation criteria for a Court potentially after-the-fact reforming the language of the agreement (where, in most situations, reforming the language of the agreement helps the Employer and harms the Employee).
Each of these items (a-c) are discussed in greater detail below.
- Mandating that attorneys’ fees be awarded to prevailing employees (when the Employer initiates litigation) regardless of what the restrictive covenant agreement provides - which is a very significant protection for employees.
- Prohibits restrictive covenants for COVID-19-related circumstances, unless the Employer pays the employee “Garden Leave” (base salary for the duration of the restrictive covenant), minus compensation earned through subsequent employment during that period. In this regard, if the Employer lays off the employee during COVID-19 (where the restrictive covenant was entered into on or after January 1, 2022) then this protection may very well kick in - which is a very valuable protection.
- Prohibiting restrictive covenant agreements for certain union employees (covered by the Illinois Public Labor Relations Act, the Illinois Educational Labor Relations Act, and with some exceptions employed in construction).
- Allowing the Illinois Attorney General to enforce and investigate violations of the new Act.
For many years the courts have been using ever-shifting and varying criteria/ “tests” for determining whether restrictive covenants are enforceable. In this regard, the Act now provides two main sections (820 ILCS 90/7 and 90/15) for making that assessment.
Under 820 ILCS 90/15 the Act provides that restrictive covenants are unenforceable unless the covenants meet a 5-part test, to wit:
“A covenant not to compete or a covenant not to solicit is illegal and void unless (1) the employee receives adequate consideration, (2) the covenant is ancillary to a valid employment relationship, (3) the covenant is no greater than is required for the protection of a legitimate business interest of the employer, (4) the covenant does not impose under hardship on the employee, and (5) the covenant is not injurious to the public.”
The Act thereby, in large part, codified two decision of the Illinois courts, specifically: the 2013 Appellate Court decision in Fifield v. Premier Dealer Services (concerning the “adequate consideration issue - discussed in detail later below); and the 2011 decision of the Illinois Supreme court in Reliable Fire Equip. Co. v. Arredondo.
The Illinois Supreme court in Reliable Fire, established what it called a “rule of reasonableness test” to determine the enforceability of a restrictive covenant, with the Court there providing that a restraint on trade is reasonable only if it:
- (1) is no greater than is required to protect a legitimate business interest of the employer;
- (2) does not impose undue hardship on the employee; and
- (3) is not injurious to the public.
Furthermore, the activity, time, and geographic restrictions must be reasonable.
Generally speaking, there are two categories of potentially protectable “legitimate business interests” that can support an Employer’s attempted enforcement (against a former employee) of a restrictive covenant in an employment agreement. In this regard, such a legitimate business interest can exist: (a) where former employees acquired confidential information through employment and subsequently attempted to use it for their own benefit; or (b) where the Employer has near-permanent customer relationships and where, but for their employment, former employees would not have had contact with the customers in question.
The Court in Reliable Fire held that “[W]hether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case.” Factors considered to be relevant to this analysis “include, but are not limited to, the near-permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions.” No single factor bears greater value in the Court’s assessment, and the Court must weigh each factor depending upon “the specific facts and circumstances of the individual case”.
The Act, at 820 ILCS 90/7 has also codified Reliable Fire concerning the above, wherein the Act now provides:
“In determining the legitimate business interest of the employer, the totality of the facts and circumstances of the individual case shall be considered. Factors that may be considered in this analysis include, but are not limited to, the employee’s exposure to the employer’s 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. No factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case. Such factors are only non-conclusive aids in determining the employer’s legitimate business interest, which in turn is but one component in the 3-prong rule of reason, grounded in the totality of the circumstances. Each situation must be determined on its own particular facts. Reasonableness is gauged not just by some, but by all of the circumstances. The same identical contract and restraint may be reasonable and valid under one set of circumstances and unreasonable and invalid under another set of circumstances.”
Notably, Illinois courts have routinely stricken restrictive covenants that did not advance the legitimate business interests of the Employer, and in this regard the 2007 decision in Cambridge Engineering, Inc. v. Mercury Partners 90 BI, Inc. is instructive. In that case the Court held that “[r]estrictions on activities ‘should be narrowly tailored to protect only against activities that threaten the employer’s interest.’ ” (quoting Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc.). A restrictive covenant is not valid if it is broader than necessary to protect the employer’s legitimate business interests. Id. Restrictions on competing will be narrowly construed to protect against only the activities that threaten the Employer’s interests, and will be balanced against the hardship to the Employee. Id.
Likewise, a non-solicitation clause is only valid if “reasonably related to the employer’s interest in protecting customer relations that its employees developed while working for the employer . . . As a result, courts are reluctant to enforce provisions that prohibit former employees from servicing customers that they never had contact with while working for their original employer.” (Id. quoting Lawrence & Allen).
“Adequate Consideration” for the Restrictive Covenant Agreement. Of particular note for employees is that in Illinois in order for a non-compete restrictive covenant agreement to be enforceable, among other things, there must be “adequate consideration”. This requirement of “adequate consideration” (now codified in the Act) is more stringent than requiring merely that there be “consideration” for a contract.
- By way of explaining the difference, generally for contracts to be enforceable there just needs to be “consideration”, which can be something very minimal (such as a “peppercorn” or a nominal sum such as one dollar).
- But the requirement of “adequate consideration” is a higher requirement. In this regard, several Illinois appellate courts (such as the lead case of Fifield v. Premier Dealer Services from 2013) have ruled that for there to be “adequate consideration” an employee must either be employed for at least 2 years before a restrictive covenant is enforceable against the employee (even if the employee chooses to voluntarily resign before 2 years) or must otherwise be provided other additional adequate consideration (beyond merely hiring the employee or paying the Employee their regular salary) for entering into the restrictive covenant agreement.
- The recently enacted Act has now codified the Fifield 2-year rule, and specifically provides that the term “adequate consideration” means as follows:
“(1) the employee worked for the employer for at least 2 years after the employee signed an agreement containing a covenant not to compete or a covenant not to solicit or (2) the employer otherwise provided consideration adequate to support an agreement to not compete or to not solicit, which consideration can consist of a period of employment plus additional professional or financial benefits or merely professional financial benefits adequate by themselves.”
One extremely significant remaining ambiguity - that has not been cleared up by the Illinois Freedom to Work Act - is what consideration is to be considered adequate if the Employer provides the employee with some additional monetary consideration, but the employee is not employed by the Employer for 2 years after signing the non-compete agreement.
In this regard, I have noticed that several large law firms have recently begun advising their Employer clients to offer Employees merely $500 or $1,000 as and for “consideration” for the employee signing the restrictive covenant agreements - which “agreements” are frequently required by the Employer to be signed for an employee to be hired or continue their employment. While judges may, or may not, ultimately rule that such small sums do constitute the required “adequate consideration”, when it is taken into account that such small sums pale in comparison to the 2-year employment otherwise required to meet the “adequate consideration” standard, and that such small sums may merely be 1 week’s pay of an employee (or just 1 or 2 day’s pay), then it is hoped that the Courts will conclude that such relatively small sums do not constitute the required “adequate consideration”. It remains to be seen how judges will ultimately be ruling on this issue.Near-Permanent Customer Relationships
Previously there had been a seven-factor test that had been used by the Courts to determine whether or not there were permanent/ near permanent customer relationships. The Illinois Supreme Court in Reliable Fire did away with that somewhat regimented test, yet those factors are still instructive. Those seven factors, generally provided, are therefore listed as follows: (1) the number of years required to develop the customers; (2) the amount of money invested to acquire the customers; (3) the degree of difficulty in acquiring customers; (4) the extent of personal contact by the employee; (5) the extent of the employer's knowledge of its customers; (6) the duration of the customers' association with the employer; and (7) the continuity of the employer-customer relationships.
In determining whether a near-permanent customer relationship exists such that it could support warranting a restrictive covenant, Illinois Courts look to the "nature of the plaintiff's business" to determine whether it is the type of business that provides unique products or services that engender customer loyalty. See, e.g., Millard Maintenance Service Co. v. Berrero, 207 Ill. App. 3d 736, 566 N.E.2d 379 (1st Dist. 1990).
If the business is in a highly competitive industry that engages in common business or sales techniques, the court is unlikely to find near-permanent customer relationships. See, e.g., Office Mates 5, North Shore, Inc. v. Hazen, 234 Ill. App. 3d 557, 599 N.E.2d 1072 (1st Dist. 1992).
In Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., 292 Ill. App. 3d 131, 685 N.E.2d 434 (2d Dist. 1997) (the court held that the Employer did not have near-permanent customer relationships because the employee outplacement business is highly competitive, clients tend to use several out placement firms, contracts are generally awarded through a bidding process, and the identities of clients are easily ascertainable.Confidentiality Clauses
With regard to Confidentiality clauses, while certainly some information is legitimately confidential and deserving of protection (e.g. - the formula for Coke), Employers frequently make the overbroad claim that everything that an employee heard/saw during their employment (including also the color of the kitchen sink) is confidential. This is oftentimes claimed by an Employer as a back-door way of attempting to prevent an Employee for working for a competitor - which, by its nature, is a restraint on trade. One such phrase that Employers sometimes use in this regard is "inevitable disclosure" (which is an easy phrase for an Employer to throw out there, but not so easy a claim for the Employer to succeed on).
There is a great deal of information that is not "generally" known to the public; yet not all of it merits protection under a confidentiality provision. See the 2012 decision in Rubloff Development Group, Inc. v. SuperValu, Inc., citing Reliable Fire, for the general observation that:
"Illinois views post-employment restrictive covenants that insist on absolute secrecy of any and all information as unreasonable and unenforceable because a person is allowed to make a living, and cannot possibly not utilize any information from his past job".
Indeed, the general rule is that companies have a legitimate business interest in "confidential particularized information disclosed to [the employee] during the time the employer-employee relationship existed which are unknown to others in the industry and which give the employer advantage over his competitors." Giffney Perret, Inc. v. Matthews.
Confidential information need not rise to the level of a trade secret in order for it to support a restrictive covenant. With regard to claimed confidential pricing information, Illinois courts have held that pricing information can qualify as confidential where both the employer attempts to keep it secret and competitors could use the information to undercut the employer.
Yet Illinois courts have likewise held that claimed confidential information cannot qualify as confidential if it is "readily available to competitors through normal competitive means." Moreover, in assessing the totality of the facts toward determining whether customer information will constitute confidential information Illinois Courts look closely to whether the information has been developed by the employer over a number of years at great expense, and whether or not such information was kept under tight security.
Lastly, on the issue of claimed misuse of confidential information, courts have held that under Illinois law an Employer must produce evidence not only that it had confidential information but also that the accused employee took the information and attempted to use it for his/her own benefit.
Attorney Fee Clauses. This is a huge issue. Under Illinois law, whether or not a non-compete/ non-solicitation agreement contains an attorney fee clause can make a huge financial risk/ reward difference to both the Employer and the Employee - and can be the key factor to whether or not: a) an Employer may or may not pursue litigation against a former Employee (which Employee one day could be you); and b) whether or not I would recommend an Employee take certain actions.
Sometimes this is the key issue for whether an individual should be agreeable - or not - to sign such a proposed agreement.
The attorney fee clause issue is also an issue which if an Employee/ potential Employee has not yet signed the proposed non-compete/ non-solicit agreement, the Employer may be willing to remove or revise such a clause. Note also that not all such clauses are written the same (sometimes the clause, if included, is written to only favor the Employer, and sometimes it is written to favor the prevailing party). My preference though, on behalf of Employees is almost always that there not be an attorney fee clause in the non-compete/ non-solicit agreement.
On this issue, the Act now mandates that attorneys’ fees be awarded to prevailing employees (when the Employer initiates litigation), regardless of what the non-compete/ non-solicitation agreement actually provides. This is an extremely important game-changing new protection for employees, and in many situations will be the determining factor to either dissuade Employer’s from bringing/ threatening lawsuits (questionable or not) against employees, or to give employees leverage during settlement negotiations of lawsuits that Employers have brought or are threatening to bring.
Blue Pencil Clauses. Employers frequently rely on a “savings” clause” (in legal jargon it is called a “blue pencil” clause - but in reality it is a vehicle whereby a Court can “save” an Employer) to make enforceable an otherwise overbroad non-compete clause. This can make it even more difficult (for individuals as well as lawyers) to determine whether or not a non-compete clause would be held to be enforceable (in whole or even in part) by the Courts.
Fortunately, there have recently been some positive developments for employees on this issue. A few years ago (2015) the Appellate Court ruled in (AssuredPartners, Inc. v. Schmitt) held that non-compete agreements that are built to scare (e.g. - grossly overbroad) may be entirely unenforceable, and may not be saved by a blue pencil clause. In this regard:
- In AssuredPartners the Employer sought to prevent the now-former employee (an insurance executive) from working anywhere in the United States within particular segments of the insurance industry that he had worked in during his entire career (professional liability insurance). The Court found that such clause was overbroad, and that the agreement was “not a candidate for judicial reformation” despite the existence of a blue pencil clause. The Court went on to importantly hold that blue-penciling is only appropriate when the over-reaching language of the non-compete was minor. As a result, the now-former employee was not bound by the non-compete agreement.
The Act has now codified part of the spirit of AssuredPartners and several other cases regarding reformation by providing at 820 ILCS 90/35 as follows:
- “(a) Extensive judicial reformation of a covenant not to compete or a covenant not to solicit may be against the public policy of this State and a court may refrain from wholly rewriting contracts.
- (b) In some circumstances, a court may, in its discretion, choose to reform or sever provisions of a covenant not to compete or a covenant not to solicit rather than hold such covenant unenforceable. Factors which may be considered when deciding whether such reformation is appropriate include the fairness of the restraints as originally written, whether the original restriction reflects a good-faith effort to protect a legitimate business interest of the employer, the extent of such reformation, and whether the parties included a clause authorizing such modifications in their agreement.”
Many employment contracts/ restrictive covenants provide that if an Employee is to pursue a claim against the Employer that the Employee needs to go through arbitration, with the contract/ written agreement frequently further providing that the Employee has to go through the American Arbitration Association ("AAA"). Many of these contracts also further provide that arbitration fees are to be split evenly between the Employer and the Employee. As such fees can run into the thousands of dollars (and sometimes tens of thousands) this can be a very real barrier for an Employee pursuing his or her rightful claims in arbitration.
Toward remedying this severe monetary obstacle, the AAA now requires Employers, and users of independent contractors not themselves incorporated, to pay all the AAA's costs of arbitration other than a $300 filing fee, and to pay the fees of the arbitrator. The rule change went into effect on October 1, 2017.
The AAA's explanation of its change, and its Employment Rules and Employment Dispute Fee Schedule, can be downloaded from Home page | ADR.ORG, last visited January 19, 2018.
These fees can be re-allocated in narrow circumstances, but are more stringent than the Christiansburg Garment standards. The Costs of Arbitration document. otherwise known as the Employment Dispute Fee Schedule, states at its end:
Arbitrator compensation is not included as part of the administrative fees charged by the AAA. Arbitrator compensation is based on the most recent biography sent to the parties prior to appointment. The employer or company shall pay the arbitrator's compensation unless the employee or individual, post dispute, voluntarily elects to pay a portion of the arbitrator's compensation. Arbitrator compensation, expenses as defined in section (v) above, and administrative fees are not subject to reallocation by the arbitrator(s) except upon the arbitrator's determination that a claim or counterclaim was filed for purposes of harassment or is patently frivolous."
Strong Recommendation that you have your Restrictive Covenant reviewed by an Attorney. The above paragraphs contain an overview of many general over-arching principles regarding restrictive covenants in Illinois, yet a proper legal analysis is highly dependent on both the facts of a particular matter and a consideration of prior case precedent - and accordingly it is strongly encouraged that if you have a particular restrictive covenant that you are trying to understand, that you should have it analyzed by an attorney knowledgeable in this area of the law.
In particular, due to the very serious potential financial ramifications to you of a restrictive covenant it is very important that you consult with an attorney (preferably before entering into an employment agreement containing a restrictive covenant, but at the least when you are considering leaving such employment, or if the Employer sends you a letter after your employment with the Employer has ended threatening to enforce such covenant - which is generally done by an Employer through a "cease and desist letter") who is familiar with such clauses - to inform you of your rights and options.
I frequently consult with employees to so advise them of their rights and options, and to advise them how they can best be protected.
I can help you understand your rights and options. I also may be able to negotiate (directly or indirectly) with your employer to tailor the terms of the non-compete so that you will be able to go out and earn a living, and so that it is not unreasonably burdensome to you.
Some employers attempt to coerce employees to sign non-compete agreements only after the employee has been working for the employer for a substantial period of time, and under certain circumstances such an agreement will not be binding against the employee.
Sometimes there is language missing from the employment contract that should properly be in the contract - and I frequently directly (through speaking with the employer/ employer's attorney) or indirectly (through my client speaking with the employer) can correct the situation and protect my client.
Call me to briefly discuss if it makes sense for you to come in for an appointment to my Chicago loop office to further discuss your employment situation.
Note that although my preference is to meet with you in person, as a convenience for individuals who are unable to get to my office (due to distance, work schedule, disability, or other reasons), you can call me to alternatively arrange to have a telephone consultation (which I frequently do) where - after briefly speaking with me - you would then send me relevant documents by scanned e-mail/fax, and then we would have a formal and detailed consultation by telephone.