Enforceability of Restrictive Covenants upon Termination

You’ve just been terminated, and to make matters worse, your former employer informs you that you are still bound by your non-compete and non-solicitation agreements. Is the former employer right? Are the restrictive covenants still enforceable after termination? The answer—as our Chicago restrictive covenant enforceability lawyers are aware—is it depends.

Several questions must be answered before a determination can be made regarding the enforceability of the restrictive covenants post-termination. These questions include:

• was the employee an “at-will employee” or did his employment contract state that he could only be terminated “for cause”?;
• what were the circumstances surrounding the employee’s terminated?; and
• what did the terms of the restrictive covenants say about enforcement after termination?

The most common type of employee in Illinois is an “at-will” employee. At-will employment means that an employer can terminate an employee at any time for any nondiscriminatory reason. An employee is an at-will employee unless his employment agreement specifically states otherwise.

Even though an at-will employee can be terminated for any nondiscriminatory reason, the circumstances surrounding the termination will determine whether the employer may enforce the restrictive covenants. In Rao v. Rao, 718 F.2d 219 (7th Cir. 1983), the Seventh Circuit held that an employer may not enforce restrictive covenants if it terminates an at-will employee (1) without good cause; and (2) in bad faith. The court explained that every employment agreement has an implied duty of good faith and fair dealing and insisting on enforcement of a covenant not to compete or a non-solicitation agreement after terminating an employee without good cause and in bad faith would breach that implied duty. The court went on to explain that if enforcement of the restrictive covenants was important to the employer, it could simply not choose not to fire the employee.

Illinois courts, relying on Rao, have taken this rule one step further. In Bishop v. Lakeland Animal Hosp., P.C., 268 Ill. App. 3d 114 (2d Dist. 1994), the Illinois court held that “in order for a noncompetition clause to be enforceable, first, the employee must have been terminated for cause or by his own accord.” In doing this, the Illinois court removed Rao’s “bad faith” requirement.

What does this all mean for an at-will employee who has been terminated? If the employer terminated him simply to save money or for another reason unrelated to the employee’s job performance, the employer is most likely not entitled to enforce the restrictive covenants. If, however, the termination was related to his job performance, the restrictive covenants are likely still enforceable after the termination. Our restrictive covenant enforceability attorneys can help Chicago clients build arguments regarding the reason for an employee's termination.

Sometimes employers enter into employment contracts with certain employees guaranteeing that the employee cannot be terminated except for cause for a specified or unspecified duration. Enforceability of restrictive covenants post-termination in these instances implicates both general contract law and restrictive covenant law. Because an employment agreement limiting the permissible reasons for termination is a contract general contract law applies. Under contract law, a party who materially breaches certain terms of a contract cannot enforce other terms of that contract. Accordingly, an employer who terminates an employee without cause is in material breach of the employment contract and cannot enforce the restrictive covenants. But again, if the termination is for cause, then the restrictive covenants are likely still enforceable (assuming the employer has not materially breached some other term of the contract). Because restrictive covenants are involved, Rao and its progeny also apply.

In sum several factors come into play when determining if an employee is still bound by his restrictive covenants following termination. Whether or not the restrictive covenants are still enforceable will likely dictate a former employee’s next steps following termination. For this reason, it is important to consult a knowledgeable attorney who will analyze the many factors and advise you on possible courses of action.

The Chicago restrictive covenant enforceability attorneys at Lubin Austermuehle, P.C. have decades of experience drafting, negotiating, and litigating restrictive covenants. Our business attorneys are conveniently located in Chicago and DuPage County and represent employees and employers throughout the Midwest region, including Illinois, Indiana and Wisconsin. Whether you are an employee who has been terminated or an employer seeking to determine if your restrictive covenants are enforceable, we can help. Contact us today online or by phone at 630-333-0333 to schedule a confidential consultation with a restrictive covenant enforceability lawyer in Chicago or Elmhurst, Illinois.