When you hire a new employee and want them to sign a non-compete agreement, the process is not a difficult one. A business can legally require new hires to sign a non-compete agreement as a condition of employment.
The problem comes with current hires—those who never signed a non-compete agreement at the time they started working for you, and they still work for you, and you now want them to sign a non-compete agreement.
The Chicago business lawyers at Ellis Legal delve into the issue of non-compete agreements with current employees below.
Where is the Consideration?
The problem is that a non-compete agreement is a contract, and contracts require consideration. When a new hire signs a non-compete agreement, the consideration is the agreement to hire the employee. But what's the consideration when a current employee signs a non-compete agreement? What is the employee getting in return for his or her surrender of rights to work elsewhere at the end of employment with the company?
Many employers have used the idea that "continued employment" is the consideration. In other words, the employer agrees to keep the employee employed as consideration for the employee's signing of the non-compete agreement.
The Promise May be Illusory
But that creates a problem, at least in Illinois: Illinois is an at-will employment state. Absent violating some specific law, an employer can terminate an employee at any time. This means that the employer is technically never bound by any promise to continue to employ the employee, making the promise of continued employment in exchange for the non-compete agreement an illusory promise.
An illusory promise is a promise where one side is bound by the terms of an agreement and can be punished for violating the contract, but the other side cannot be penalized or is not bound by the terms of the agreement.
Put another way, just because the employee signed the non-compete agreement doesn't stop the employer from firing the employee a week, a day, or an hour after the agreement is signed. Thus, the employer is really not bound by anything.
Creating a Contract?
The so-called promise of continued employment also has another problem for employers, in addition to making the non-compete agreement potentially unenforceable: it could be construed as an employment contract.
In other words, the consideration of continued employment may transform an at-will employee to an employee with an enforceable promise from you to keep the employee employed—a promise you could now get sued for if the employee is fired or let go.
What Can You Do?
One way around this is to think of some type of consideration that would not be illusory in return for the signing of the non-compete agreement.
For example, a slight raise in pay, an extra vacation day, or some other work benefit that wasn't present before the agreement was signed could be the consideration that supports the signing of the non-compete agreement.
Questions about your business contracts? We can help. Speak with a Chicago business law attorney at Ellis Legal at (312) 967-7629 today.