Enforceability Upon Termination

Employers and employees alike often have the same question: is a restrictive covenant enforceable if the employee was fired? This question is crucial as an employer may not want the former employer immediately soliciting customers or working for a competitor following termination. The answer to the question—as is often the case in law—is “it depends.”

Several factors go into the determination of whether a restrictive covenant is still enforceable following termination including:

• The employee’s status as an “at-will employee” or an employee with an employment contract stating that the employee can only be terminated “for cause”;
• The circumstances leading up to the employee’s termination (e.g. was the employee fired for talking to a competitor or did the employer simply have a personality conflict with the employee); and
• The language in the restrictive covenant addressing post-termination enforceability.

Termination of At-Will Employees

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

The Seventh Circuit addressed the issue of the enforceability of a restrictive covenant on an at-will employee after termination in Rao v. Rao, 718 F.2d 219 (7th Cir. 1983). Here, 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 based its decision on the implied duty of good faith and fair dealing present in every employment agreement containing restrictive covenants such as covenants not to compete or non-solicitation agreements. The court reasoned that firing an employee without good cause and in bad faith while still insisting on enforcing restrictive covenants would breach that duty of good faith and fair dealing. According to the court, if enforcing the restrictive covenants meant so much to the employer it always had the option of simply not terminating the employee.

Illinois courts have taken Rao 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.

Generally speaking, this means that an employer can enforce restrictive covenants post-termination if the reason for the termination was related to the employee’s job performance. If, however, the employer terminated the employee 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.

Termination of Contract Employees

Sometimes employers enter into employment contracts with certain employees which limit the reasons an employee can be terminated during the life of the contract. Often these contracts provide that the employee can only be terminated “for cause” or something to that effect. In these cases, both general contract law and specific restrictive covenant law are implicated. Because these employment contracts are contracts general contract law applies.

Under contract law, a party who materially breaches a contract cannot enforce it against the other party. This means an employer who breaches the contract for terminating an employee for any reason other than those provided for in the contract breaches the contract. Accordingly, it cannot enforce the other terms of the contract namely 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. It is important to consult a knowledgeable attorney who will analyze the many factors and advise you on possible courses of action.

The business attorneys at DiTommaso 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 Wheaton, Deer Park, Hinsdale, Countryside, and Geneva. 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 locally at 630-333-0000 to schedule a free consultation with our team at one of our offices in Chicago or Oakbrook Terrace, Illinois.