The Dangers of Overbroad Non-Compete Agreements
Many employers require their workers to sign non-compete agreements (NCAs), especially when the employees have unique talents or abilities. Employers are within their rights to try and limit any damage that may be caused to their brand by an employee’s departure, but if they overstep legal bounds, the non-compete agreement may be declared invalid.
As a business law attorney, I am often asked about non-compete agreements by my clients. I remind them that they must be careful when requiring employees to sign NCAs, but when used properly, such agreements can protect the company
Contract Law Basics
For an NCA to be a valid contract, it must meet the specifications of any other contract under Illinois law, namely containing an offer, acceptance, and consideration. In other words, two parties must be able to reach an agreement to essentially trade something for something else—a good for a service, usually. Consideration is a small token of acknowledgment that something is being exchanged. For example, a transaction at a store is essentially a contract. The store is offering items for purchase, and giving them your money signifies acceptance of those terms. The item you buy is the consideration.
In years past, continued employment might have been classed as consideration for purposes of an NCA, but this is no longer true, as employers would retain employees for very short periods of time after the NCA was signed and then terminate them, a practice that Illinois courts held to be unethical in 2013. Two years of continued employment was held to constitute valid consideration, but if an employee is terminated or leaves before then, mere employment itself cannot be used as consideration in a non-compete agreement.
Factors to Consider
Generally, under Illinois law, there are four factors you should investigate to see if your NCA can be held to be unreasonable. They are:
- Duration: Most NCAs are drafted to last 24 months (two years) or less; any more will stray into potential unconscionability.
- Area: It is reasonable to restrict competition within a specific geographical area, but that area must not be too large. Wanting to stop a former employee from doing business in, for example, a city or area like Evanston or Chicago’s northern suburbs is one thing; attempting to restrict competition in all of Chicagoland is quite another. If your agreement is too broad in this way, it will likely be considered unenforceable.
- Scope: Depending on your business, your agreement may need to be tailored to prohibit competition in an appropriately narrow field. It is also important to limit your non-compete agreements to employees whose skills or talents are appropriately uncommon. For example, if you own a restaurant, you cannot require your minimum-wage line cooks to sign a non-compete to keep them from working for different restaurant.
- Protecting legitimate business interests: Merely wanting a non-compete agreement does not mean that you will be able to enforce one. You must be able to show that you are protecting proprietary interests or information, rather than simply not wanting competition.
If a non-compete agreement is overbroad, it can effectively constitute a restraint of trade, which will almost always render the agreement invalid.
We Are Here to Help
To learn more about non-compete agreements in Illinois, contact one of our experienced Naperville business law attorneys. Call 630-756-1160 for a confidential consultation at the Gierach Law Firm today. We will help you understand your available options and work with you in developing best practices for your business.