Are Non-Compete Agreements Right for Your Company?
Non-Compete Agreements or Non-Disclosure Agreements are vehicles used to restrict the work an employee can perform for another employer after he or she leaves his current employer. As such, they are generally viewed as restraints of trade, which are typically frowned upon by the Courts. However, under the right circumstances, the Courts will enforce them. The critical question is if an employer really needs to have Non-Competes in place at all. There may be other ways to prevent unfair competition without the formality of a Non-Compete. In addition, in Illinois, Non-Competes have been found unenforceable for certain level wage earners. Is a Non-Compete right for your business?
While these types of contracts are used to protect trade secrets, highly confidential information or unique software, Non-Competes are also a valuable retention device. Given the current labor shortage, ensuring qualified employees do not leave your company for the competition is more important than ever.
A core question every business should consider is if the company has actual trade secrets or highly confidential information that it needs to protect? Does your company have unique, proprietary software that could jeopardize the company’s ability to outbid the competition if it were disclosed? If the answer to these questions is “yes”, then having a Non-Compete put in place may be the right solution for your company.
For a Non-Compete Agreement or Non-Disclosure Agreement to pass muster in Illinois, the first step is to consider exactly what protectable interest is served by having the restriction? Customer relations are important, marketing strategies and pricing are central to a successful business.
Some factors to consider are:
- The length of time or resources an employer expended to build the relationship;
- The uniqueness of the item sought to be protected;
- The amount of money used to acquire customers;
- The difficulty in acquiring new customers or retaining old ones;
- The extent of personal contact by the employee; and
- The duration of that customer’s association with the company.
None of these factors in and of themselves is determinative. Instead, Courts will consider the totality of the circumstances.
For a Non-Compete Agreement to be enforceable, it must not impose an undue hardship on an employee. The restriction must be reasonable in terms of the time an activity is restricted. The longer the restriction is, the more likely it will be found to be unenforceable. Generally, 2 years appears to be the outside limits that a Court will enforce. A Non-Compete also must be reasonable in terms of its geographic scope. Attempts to prohibit an employee from working in a similar capacity anywhere in the United States will likely be found to be overly broad and unenforceable. Finally, care should be crafted not to make the prohibition against future employment too wide open and encompass all lines of work. While it may be acceptable to narrowly tailor a restriction in terms of the same or similar duties performed for the old employer, blanket restriction from working in any capacity is likely to fail.
A battle has been drawn in Illinois as to what is used to support the Non-Compete. A Non-Compete is a legally binding contract. As such, it must be supported by adequate consideration. In other words, one party must receive or give a tangible benefit to the other to support the agreement. In the employment context, since most employment is “at will” and can be terminated at any time, a promise of continued employment is illusory. Some Courts in Illinois have adopted a bright line test, that in the absence of other independent consideration, 2 years of continued employment as sufficient to support these type of agreements. Others have refused to follow this litmus test. It is an area that will undoubtedly be resolved only by a challenge in the Illinois Supreme Court to remove the ambiguity.
If your business has crafted a Non-Compete which you believe will stand up in Court and stop a former employee from unfairly competing against you, consideration should be given to the benefits and risks of these agreements. First, the knowledge that an employee has signed a Non-Compete is often enough for that employee not to explore outside opportunities with competitors. In addition, if a departed employee becomes involved in a lawsuit or loses his or her job due to a Non-Compete, it sends a powerful message to your current employees who may be considering jumping to a competitor.
The flip side of the argument is that a Non-Compete may make employees feel trapped in a company. Morale may suffer and employees may not give all their effort. It can work to de-motivate key employees.
Finally, a business must address whether it has the intestinal fortitude and financial capability to fully endure the litigation that will be required to enforce a Non-Compete Agreement. While a “cease and desist” letter from your attorney may be sufficient to persuade a new employer from hiring a departing employee subject to a valid Non-Compete Agreement, some companies will nevertheless decide on litigation. Strategically, this can be designed to prevent the employee from competing, but it may also be used to injure a competitor who decides to proceed regardless. Beware however, that Court action can be protracted and expensive. A Pyrrhic victory may await an employer who spend valuable resources to restrict an employee and even obtain money damages only to find the employee does not have the money to pay any judgment, or worse yet files for bankruptcy.
There are many considerations in deciding if a Non-Compete Agreement is right for your company. If the benefits of a Non-Compete Agreement outweigh the possible morale risks and potential enforcement costs, then it’s time to take the next step. Contact Boznos Law. We have experience in crafting enforceable Non-Compete Agreements for businesses.
With over 30 years’ experience in advising employers on cutting edge employment law issues, let Boznos Law work with you to ensure you are ready to meet the challenges posed by the ever-changing employment law landscape. Call Bill Boznos today at (630) 375-1958 or contact us at www.boznoslawoffice.com/contact-us through our website at www.boznoslawoffice.com.