Continued Employment as Consideration in Illinois—A Short Primer

Following the Illinois appellate court decisions in Diederich Insurance Agency, LLC v. Smith, 952 N.E.2d 165, 169 (5th Dist. 2011) and Brown & Brown, Inc. v. Mudron, 887 N.E.2d 437, 441 (3d Dist. 2008), it is well settled in Illinois that continued employment is adequate consideration to support a restrictive covenant agreement (i.e., an agreement containing post-termination restrictions on an employee’s ability to compete and/or to solicit customers and employees). It also is settled law that for such consideration to be effective, the employee must remain employed for a “substantial” period of time following signature to the agreement. The open question that remains is what amount of time qualifies as “substantial?” While there is no bright-line test to answer this question, there is enough guidance in Illinois case law from which employers can make calculated decisions. Further, as is typical with Illinois restrictive covenant jurisprudence, depending on the facts, the cases provide both shields and swords in almost any dispute over the sufficiency of continued employment as consideration.

Majority ViewTwo Years

The majority of courts draw the line at two years. Diederich, Brown & Brown; Lawrence & Allen, Inc. v. Cambridge Human Resources Group, Inc., 685 N.E.2d 434, 441 (2d Dist. 1997); Applied Micro, Inc. v. SJI Fulfillment, Inc., 941 F. Supp. 750, 753 n. 3 (N.D. Ill. 1996) (collecting cases). Other cases, however, suggest that employment for one year can be considered a “substantial period” of employment. See Mid–Town Petroleum, Inc. v. Gowen, 611 N.E.2d 1221, 1226 (1993) (while noting that the issue of consideration was not directly addressed, citing approvingly to two cases involving a post-covenant term of employment of approximately one year).

Minority ViewNo Numerical Formula

At least one Illinois state court, albeit in dicta, has suggested that courts are not limited to a numerical formula in evaluating what constitutes a “substantial period” of employment. Woodfield Grp., Inc. v. DeLisle, 693 N.E.2d 464, 469 (1998). “Factors other than the time period of the continued employment, such as whether the employee or the employer terminated employment, may need to be considered to properly review the issue of consideration.”

Adopting the logic of Woodfield, the federal district court in the recent decision of LQD Corp. v. Thrasher, 785 F. Supp. 2d 737 (N.D. Ill. 2011) held that one year was a substantial period of employment given that the employee worked for that period after signing the agreement and because the employee was not fired, but voluntarily resigned. The court reasoned: “Without a stronger foundation in law and logic, the Court cannot mechanically apply a bright-line test that, in certain situations, may have pernicious consequences. The more prudent course of action is to take the more fact-specific approach that some Illinois courts have suggested.”

Conclusion

Employers should continue to assume that most courts will follow the majority view when ruling on the issue of continued employment as consideration. The majority view also will be an effective shield to defeat a TRO in litigation (where the employer is seeking to hire an employee who appears to be encumbered by a restrictive covenant agreement). But, with respect to affirmative enforcement, employers should also be mindful of the minority view as a potential sword to support consideration for agreements where the defendant-employee has not satisfied the two-year threshold.

Tobias E. Schlueter is a shareholder in the Chicago office of Ogletree Deakins.

Topics:  Hiring & Firing, Non-Compete Agreements, Restrictive Covenants

Published In: General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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