Continued Employment Is Not Sufficient Consideration For Restrictive Covenants Unless The Employee Remains Employed For At Least Two Years

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In Illinois, it has long been recognized that a restrictive covenant in employment is enforceable so long as the employee engages in "substantial continued employment" after the employee signs the agreement.  Illinois courts typically have found sufficient consideration supporting an agreement when an employee worked for more than two years, and conversely have rejected agreements where the employee worked for the employer for just a few months.  The courts, however, have not established a bright-line rule.  Until now.

Last week, the Illinois Appellate Court held for the first time that an employee must work at least two years after signing a restrictive covenant agreement.  Otherwise, the agreement does not have sufficient consideration and cannot be enforced.  Fifield et al. v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327.  In its decision, the Court also questioned the distinction between pre-employment and post-employment agreements, indicating that its ruling applies to all restrictive covenants that rely on continued employment as consideration and restrict employees’ future employment opportunities, regardless of whether they are executed before or after the start of an individual’s employment.

In Fifield, Eric Fifield signed a restrictive covenant with his employer, Premier Dealer Services (“Premier”), as a condition of his employment and before he began working for Premier.  The agreement contained non-compete and non-solicitation provisions restricting Fifield from working for competitors for a period of two years after his employment with Premier ended.    Fifield resigned three and one-half months later and filed a complaint for declaratory relief, arguing that the agreement was not enforceable because of inadequate consideration.  Premier filed a counter-claim seeking to enforce the restrictive covenant.  It argued that there was sufficient consideration because Fifield signed the agreement before he was employed, and since Premier had no obligation to employ him, his employment alone was enough. 

The Illinois Appellate Court disagreed with Premier.  In order for continued employment to be adequate consideration, the Court held that the employee must be employed for at least two years.  According to the Court, this rule applies regardless of whether the employee is terminated, or resigns his or her position before the end of the two-year period.  The Court also rejected the argument that Fifield’s employment, by itself, was sufficient consideration.  The Court brushed aside any distinction between agreements signed during the pre-employment stage, and agreements entered into after employment has already begun.  The Court reasoned that because the agreement restricted Fifield’s employment opportunities after his employment with Premier ended, it was a “post-employment” restrictive covenant (regardless of when Fifield executed the agreement), and therefore, it would only be binding if there was substantial continued employment.

For employers conducting operations in Illinois, this is a huge (and unwelcome) development with respect to restrictive covenants. In summary, Illinois employers must be mindful that: 1) continued employment is only sufficient consideration for restrictive covenants if the employee remains employed for at least two years; 2) the rule applies regardless of whether the employee resigns or is terminated; and 3) the rule appears to apply to all restrictive covenants that restrict the individual’s job opportunities post-employment, regardless of whether they were executed before or after employment commenced.