Employment Covenants – Need to Update
Recently one of my clients had an estimator jump ship and go to work for a competitor. As is usually the case the employee was just coming into his own after several years of training and was becoming an asset to the company. When he announced his departure, he was reminded that he had signed a Covenant Not to Compete which included non-solicitation and non-disclosure covenants. The employee firmly stated he was not joining a competitor and would not be working in the same field. This employee lied. Within weeks emails surfaced from the ex-employee to several of my client’s customers advising of his new employment and that he was ready, willing and able to do business with them for his new employer.
My client dug out the Employment Covenant that had been signed. Unfortunately it had been entered several years ago and not updated to take into account a recent Illinois Supreme Court decision on Restrictive Covenants and more importantly an Illinois Appellate Court decision issued in June of 2013.
My client’s agreement was the usual Employee Confidentiality, Non-Disclosure, Non-Competition and Non-Solicitation Agreement. It was for four years from termination of employment and prohibited the employee from working for any company in the same industry within the counties of Cook, DuPage and Lake. It also prohibited the employee from soliciting customers for the same amount of time. Under current Illinois law as announced by a recent Illinois Supreme Court decision a restrictive covenant will be enforced if it contains a reasonable restraint and the agreement is supported by adequate consideration. In determining reasonableness the court applies a three prong test. The covenant can be no greater than required for protection of a legitimate business interest of the employer. The covenant cannot impose an undue hardship on the employee and the covenant cannot be injurious to the public.
Where the covenant at issue failed was that it was too long i.e. four years. In addition it prohibited the employee from working in the same industry when really all that matters is that customers and legitimate prospects not be solicited. Further it was too broad covering multiple counties when the client’s business is primarily centered in one.
A recent Illinois Appellate Court decision elaborated on the issue of adequate consideration for employment covenants. The Appellate Court held that for adequate consideration to exist there has to be two years of continued employment. This is true even if the employee resigns instead of being terminated.
If you have existing employment covenants you should have us review and update them. Also the form you are using should be updated for new hires. In order to meet the new adequate consideration criteria you will most likely have to pay a signing bonus to both current employees and new hires. However, the expense of doing so is outweighed by having an enforceable agreement. You spend a great deal of time and money training people and that benefit should not go to a competitor if you can prevent it.
The law is not static and continues to evolve. You need to keep agreements current and up to date with changes in the law.