An Illinois Appellate Court decision last week held that without additional consideration, mere employment for less than two years would not be deemed sufficient consideration for restrictive covenants in an employment agreement signed by a former employee upon being hired (Fifield v. Premier Dealer Services). This only applies in Illinois, of course, but courts in many other states have adopted similar rules.
What is an employer to do? For employers frustrated by their inability to prevent former employees from directly competing with them or soliciting their employees, customers or suppliers, one possible answer is to include non-competition, non-solicitation and/or other restrictive covenants in other compensation plans or arrangements. "Public policy" in most states, as announced by their courts, "disfavors" non-compete provisions because they can prevent an individual from working in his or her chosen field. However, many [most] states also follow the employee choice doctrine, which allows an employer to retain incentive or additional compensation from a former employee if he or she chooses to work for a competitor.
A 2013 decision from the Supreme Court of New York, Lenel Systems International Inc. v. Smith, illustrates this view very nicely:
Defendant contends that rescission is unavailable to plaintiff because the noncompete provision is unreasonable and thus unenforceable as a matter of law. We reject that contention. Although defendant correctly cites the well-settled proposition that "noncompete clauses in employment contracts are not favored and will only be enforced to the extent reasonable and necessary to protect valid business interests" [citations omitted], there is an equally well-settled exception to that general principle "where an employer conditions receipt of postemployment benefits upon compliance with a restrictive covenant" [citations omitted]. Under the "employee choice doctrine," if an employee "is given the choice of preserving his [or her] rights under his [or her] contract by refraining from competition or risking forfeiture of such rights by exercising his [or her] right to compete, there is no unreasonable restraint upon an employee's liberty to earn a living" [citations omitted]. Where the doctrine applies, "a restrictive covenant will be enforceable without regard to reasonableness" so long as an employee voluntarily left his or her employment.
The most common types of compensation plans and agreements into which insert non-competes and other restrictive covenants are equity-based compensation awards and non-qualified deferred compensation plans.