Restrictive covenants, such as non-compete and non-solicitation clauses, are becoming increasingly common in employment contracts. These types of clauses are meant to prevent an employee from offering the same services as their former employer or poaching clients and co-workers from their previous company. While such provisions in a contract can look very similar to each other, they serve two distinct purposes. If you are an employer who uses restrictive covenants or you have been asked to sign an employment agreement that contains one, it’s important to know the difference.
A non-compete agreement is a clause that prevents an employee from competing with an employer’s business after they leave their current employment relationship. Non-compete agreements can restrict an employee’s ability to either work for themselves or a competitor in the same field for a specific period of time. They are most common in industries where an employee is expected to build up a client list or where highly confidential proprietary information is involved. A non-compete can also be included in an agreement when a business is sold.
In determining whether a non-compete agreement is enforceable, a court will consider whether the employer has a legitimate business interest that needs to be protected. A judge will also consider the geographic scope and duration of the restraint, as well as the specific industry to which it applies.
A non-solicitation agreement is a provision in an employment contract where an employee agrees not to solicit their former employer’s clients, customers, or employees after the end of the employment relationship. Such agreements may apply whether the employee leaves to work for a competitor or they form their own company. These provisions will usually specify a certain amount of time during which the solicitation is prohibited after the employee’s departure.
Courts will enforce non-solicitation agreements only if they are reasonable. Generally, a non-solicitation provision will be deemed reasonable by a judge if it is no broader than necessary to safeguard the legitimate business interests of an employer. If such a clause would place an undue burden on a former employee and affect their ability to work in the same type of employment, it may be unenforceable.
Some employment agreements contain non-compete clauses. Others might include a non-solicitation clause — or both types of restrictive covenants. Regardless of which type of restrictive covenant is used, employers should take care to ensure the terms are not ambiguous, overly restrictive, or too broad. Employees who are presented with such a contract at the beginning of employment or with a severance package must also be careful that the terms to which they are agreeing do not impact their ability to earn a livelihood.
Some of the differences between non-compete and non-solicitation agreements that should be noted include the following:
Just because an employment agreement contains a restrictive covenant does not mean that it’s enforceable. Both non-compete agreements and non-solicitation agreements should be balanced to protect a company’s legitimate business interests with the employee’s ability to pursue employment. However, in the event of litigation, a non-solicitation agreement is more likely to be upheld in court since it does not impose as harsh restrictions on an employee’s right to earn a living in their chosen field.
In addition to ensuring that a non-compete or non-solicitation agreement isn’t overly restrictive or burdensome for an employee, employers must take note of new legislation that went into effect at the beginning of 2022. The Freedom to Work Act prohibits employers from entering into a non-compete agreement with an employee who earns less than $75,000 a year. This amount will increase by $5,000 every five years until 2037.
The new Illinois law also applies to all non-solicitation agreements executed after January 1, 2022. Employers cannot enter into these types of agreements with employees earning a salary of less than $45,000 a year. This amount will increase to $50,000 in 2027 and go up to $52,500 in 2032. If an employer enters into any type of “covenant not to compete” with an employee who satisfies the monetary threshold, the agreement will be unenforceable.
The Freedom to Work Act does not apply to confidentiality agreements, trade secret agreements, or restrictive covenants regarding business acquisitions.
Whether you’re an employer who uses restrictive covenants, or you’re an employee who is subject to one, it’s essential to have an experienced business law attorney by your side who can advise you regarding these matters. Located in Rolling Meadows, Litico Law Group serves the legal needs of business owners and entrepreneurs throughout Illinois. We welcome you to contact us by filling out our online form or calling 847-307-5942 to schedule a consultation to learn how we can assist you.