Most contracts must be supported by an exchange of value (legal term: consideration) to be enforceable. Under the prior law, the value that supported a non-compete agreement depended on when the agreement was executed. Usually, the employee’s employment was used as the basis to support the non-compete agreement.
For an employee who signed an agreement after being employed, the agreement was binding after “continued employment” for a “substantial period of time,” which Illinois courts defined as “at least two years.” In other words, a non-compete signed with an employee already on board would not be valid for at least two years.
For new employees signing a non-compete upon hire, the employment itself, regardless of how long it lasted, constituted adequate value to support the non-compete agreement. In other words, the non-compete agreement would be valid upon execution.
Recent Court Decision Affects Changes
The First District Illinois Appellate Court’s recent decision in Fifield v. Premier Dealer Services marks a substantial change in Illinois employment law. It essentially redefines what constitutes “adequate consideration (value)” to support a non-compete agreement.
The First District Appellate Court eliminated the distinction between current and new employees as the decision disregards when the non-compete agreement was signed.
The decision further stipulates that if employment is to be the only value exchanged, then the employment must be for a substantial period of time, which means at least two years of continued employment.
In other words, a non-compete agreement now becomes valid after two years of employment.
Under the decision, a new employee who signs a non-compete agreement prior to beginning work would need to be employed for at least two years for the employment. And, the decision reaffirmed that this rule applies even if the employee voluntarily resigns. This means that if a new employee resigns after working for the employer for less than two years, the non-competition agreement does not apply.
As a result, for a non-compete agreement to be binding and enforceable with an employee who leaves the job before working two years at the employer, it must contain some form of value (consideration) beyond mere employment. This could be in the form of a specific compensation tied directly to the employee’s signing of the non-compete agreement or perhaps a protection period to constitute the required value.
In Fifield, the parties included an amendment to the non-compete agreement that if the employee was fired without cause during the first year of employment, the non-compete agreement would not apply. The court found that this provision did not constitute adequate value, as it only protected the employee for one year of employment.
Review Non-compete Agreements in Place
As a result of this recent change in Illinois employment law, employers should review their standard non-compete agreements for new and current employees. It is important to ensure that non-compete agreements are enforceable for any and all employee departures.