Non-Compete Agreements: What are they, and when are they enforceable?
Many employers want to include a non-compete provision in their employment contracts. As you might guess from the name, a “non-compete” is an agreement made between parties in which one accepts limits on certain competitive behaviors. Most often in labor relations, an employee agrees not to work for a competitor of their employer after their current position ends. This is typically done to prevent losing employees to competitors, having employees take clients with them when they leave, and to protect secrets, information, and client lists that the employee obtained during their work. Courts refer to non-competes as “restrictive covenants,” and often find these clauses to be too burdensome on the employee and a “restraint on trade” – and therefore unenforceable.
For a non-compete agreement to be enforceable, it must first be reasonable. In the eyes of the law, this means that it:
- Must protect a “legitimate business interest” of the employer;
- Must not place “undue hardship” on the employee; and
- Does not violate public policy.
Legitimate Business Interest
A non-compete agreement is only valid if founded in a legitimate business interest. It must be the best and narrowest method of safeguarding the employer’s interest and related to the matter in question. For example, while protecting client lists could be a valid interest, a non-compete signed by an employee without access to the lists is not “related” to said protection. In the eyes of Illinois courts, the existence of a legitimate business interest is based in the “totality of the facts and circumstances in the individual case.” This means that the court will look at ALL facts in their determination and will not rely on one sole fact or factor. There are two general categories of potentially protectable legitimate business interests that can support an employer’s non-compete:
- Where former employees acquired trade secrets or confidential information through employment and subsequently attempted to use it for their own benefit; or
- 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 – for example, doctors’ and physicians’ offices. These relationships must be somewhat personal and extended; simply knowing the clients is not enough.
Confidential information covers a wide range of information that can be classified into two general categories: information offering competitive advantage (e.g. marketing plans, research, or formulas), and personal information (e.g. client addresses or bank account numbers). Learning the trade (e.g., skills tutoring, processes and procedures, etc.) does not qualify as learning confidential information.
Trade secrets are a more specific subcategory of confidential information. They’re used directly for business and provide an economic advantage. It could prove severely damaging if it falls into the hands of a competitor. Trade secrets are only considered “related” if it is possible that the employee possesses or could have gained knowledge regarding the trade secret. Examples include the formula for Coca Cola and Google’s search algorithm. Trade secrets are distinct from intellectual property – trade secrets do not have to be filed with a government authority.
Customer lists also warrant protection in many businesses. They are more “protectable” if the employee had access to a full list and the client list is kept secret.
No Undue Hardship
The non-compete must be limited in scope. One clear example is the geographical scope of the restriction. A reasonable restriction might prohibit an employee from competing within 5 or 10 miles, depending on the area and population density. An unreasonable (and thus unenforceable) clause might prevent the employee from competing in the entire state.
Does Not Violate Public Policy
The courts have wide latitude when interpreting this condition. Basically, if any restriction is against the general public’s interest, a court can deem it unenforceable.
The recently-enacted Illinois Freedom to Work Act (effective January 2017) prohibits private-sector employers from entering into non-compete restrictions with “low-wage employees” – those earning minimum wage* (federal, local, or state) or $13/hour, whichever is greatest. Specifically, the Act bans agreements that restrict the “low-wage employee” from performing:
- Any work for another employer for any specified period of time;
- Any work in any specified geographical area; or
- Work for another employer that is similar to the employee’s work for their current.
*As of the drafting of this article, the federal minimum wage is $7.25/hour; the state minimum wage in Illinois is $8.25; and the local minimum wage in Chicago is $12/hour.
Does a Non-Compete Need Consideration to Be Valid?
Yes. Like any other contract, consideration is required for a non-compete to be enforceable. This just means that the employee must benefit as a result of signing the agreement. This might include obtaining the job (if the employee signs the non-compete as part of the employment agreement) or keeping the job for at least two years (if the employee did not sign it until after they were already employed).
Illinois courts give special scrutiny to restrictive covenants in order to keep employers in check and protect employees. However, this does not mean that your non-compete will be ruled unenforceable. We recommend you have an attorney look at all the facts of business’ situation to determine whether a non-compete provision is beneficial for you.
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