Non-Competition Covenants: It Does Not Matter Who Ends The Relationship

         A recently-fired employee was heard to say that the good news of his situation was that his covenant not to compete was unenforceable because he had not resigned but had been fired. He is mistaken about that. The enforceability of a covenant not to compete does not depend on whether the employment relationship is ended by the employer (i.e., a firing) or by the employee (i.e., a voluntary resignation).

           All contracts require consideration to be enforceable. Covenants not to compete are no exception. Promises of employment can be lawful consideration, and a mere offer of employment might suffice for a covenant that is made at the start of an employment relationship (though there is now some doubt about that in Illinois law). But it takes more than a mere offer of continued employment to support a non-competition covenant that is made after the start of the employment relationship. In that case, employment must continue “for a substantial period of time.” As a practical matter, two years of continued employment is deemed the minimum to qualify as a “substantial period of time.” Otherwise there is a risk of illusory consideration: The work-at-will rule would permit an employer to fire an employee immediately after locking the employee into a covenant not to compete. The two-year rule applies whether the employment relationship is terminated by the employer or by the employee. The chap who declared his covenant unenforceable because the employer fired him is mistaken, unless, of course, there is something peculiar to his agreement that so provides (e.g., a clause to the effect that the covenant would be unenforceable if the employee were fired without cause).

             Doubt about the adequacy of consideration can be removed by supplying consideration in a form other than employment itself, for example, money, an extra sum of money specifically earmarked as consideration for a covenant not to compete. The question whether a covenant not to compete is or is not supported by consideration is not the only question relevant to enforceability but only the first question. Or to put it another way, consideration is a necessary but not sufficient for enforceability. The absence of consideration is fatal but its presence is not sufficient of itself to render the covenant enforceable. It must also be reasonable in its terms and reasonably necessary to protect legitimate business interests of the employer lest it be a mere restraint on trade.

Hostile Work Environment

by David McCarthy                     

Another interesting misconception about hostile environment and retaliation came to our attention recently.  

An individual we will name John Doe had been employed for a relatively short time, about six months, but long enough to know that he and the owner of the business did not get along. What brought it to a head was a disagreement over a "prioritizing" of tasks.  

Mr. Doe was filling an order for a customer who was due to arrive later in the day. The owner asked him to put that work down and turn his attention to a different task -- a task that was perfectly legal. Mr. Doe did not do what the owner asked him to do. He opposed the owner and asserted that the task he was working on should receive priority.  

The owner threatened to strike Mr. Doe if his opposition continued, and Mr. Doe was suspended from work. He then contemplated the filing of criminal charges, and supposed that doing so would position him to be a viable retaliation plaintiff if he got fired. 

In our judgment, the State had a pretty good case against the owner on a misdemeanor charge, but that was not going to make Mr. Doe a viable retaliation plaintiff. Every antagonistic relationship between employees and superiors, and there are a lot of them, does not provide the ingredients for a "hostile environment" case.  

To get to that place, the "hostility" has to relate to a form of discrimination that is prohibited in the workplace, e.g., lewd jokes, racist remarks, mocking older workers. 

Something more than a mere clash of personalities is required, though a clash of personalities can certainly be distracting and stressful and unpleasant. Mr. Doe did not fall into any of the classes who are protected by workplace discrimination laws, and the friction between him and the owner, though plenty hostile, did not rise to the level of a "hostile environment" case.  

And in our judgment, the filing of a complaint with the police did not qualify as a predicate act that would set Mr. Doe up to be a viable retaliation plaintiff were he to lose his job over the dispute with the owner because it did not constitute the opposing of an unlawful employment practice. (Ironically, if Mr. Doe were to lose his job and apply for unemployment benefits, an objection by the employer on the grounds of insubordination would have a fair chance of being sustained.)

Family Medical Leave Act and Job Security

by David McCarthy

It is easy to suppose that an employee on leave under the Family and Medical Leave Act ("FMLA") enjoys a special "halo" of job security and protection that co-workers who are on the job do not. After all, businesses subject to FMLA must allow eligible workers up to 12 weeks of unpaid leave each year plus reinstatement to their old position. That invites an inference that an employee on leave has privileges and protections that an employee at work does not.

But it is not so. The work-at-will rule continues to apply to the employment relationship and does not yield to leave-taking.

Suppose the employee on leave had worked the night shift, and the employer puts an end to the night shift. Does that mean that only those who were actually working the night shift are out of a job while the one who was on leave is not?

Answer: no.

If the position would have been eliminated while the employee was on active duty, so to speak, the fact that the employee is on leave does not preclude elimination of the position or obligate the employer to hold the position open for the employee.

FMLA is codified at 29 U.S.C. 2601 et. seq. It generally applies to businesses with 50 employees or more. An eligible employee is one who has worked for the employer for at least 12 months (though that need not be 12 months in a row) and who has worked at least 1,250 hours in the 12 months immediately prior to the start of leave. That employee is entitled to reinstatement to his/her old position or to a position that is similar in terms of pay, benefits, etc.)

The Wage Act

The sales representative had this dilemma: He had an offer of new employment that would soon expire. But to collect commissions on sales made in the current year he had to remain with his current employer until April 1st of the next year.

The question was whether he had any tools available, other than his own powers of persuasion, to obtain the commission immediately.

Answer: Probably.

The Illinois Wage Payment and Collection Act ("Wage Act" or "Act"), 820 ILCS 115/1 et seq., classifies earned commission as final compensation for purposes of paying "separated" employees. The commission in this case was, in fact, earned. The sales had been closed. The goods had been received and paid for.

Section 5 of the Act states that the employer "shall pay" the final compensation of a separated employee at the time of separation if possible but in no case later than the next pay day. And there is no except-for language in case the agreement of the parties calls for payment on some other basis. Moreover, an agreement in Illinois incorporates and includes the law of Illinois in effect at the time when the agreement was made unless the agreement clearly excludes such incorporation. The agreement under examination here did not contain that exclusion. Hence, there was a conflict between the agreement that required presence on the payroll until April 1st of the year to come and the Act, and the agreement had to yield to the Act.

That would seem to put the employee in a solid position to accept the new offer of employment and demand his commissions. So why is the answer to the question posed above just "probably"? Because the Act applies only to "Illinois employers." It was far from clear whether there was an "Illinois employer" in this case.

The company was organized under the laws of a state other than Illinois. It had its principal place of business in a state other than Illinois. Its presence in Illinois was largely confined to the presence of its sales representative, an Illinois resident who conducted business from a location in Illinois. Most of the decisional law that bears upon this question is something less than "controlling legal authority." For it comes from the federal trial courts in Chicago and it analyzes the "Illinois employer" question on a case-by-case basis.

We recently made an inroad of sorts on this point before the Illinois Appellate Court. It began with a six-figure money judgment against an out-of-state business executive who was found personally liable for the severance pay of a former employee on the grounds that he had knowingly permitted the true employer to violate the Act by withholding the pay. (Under section 13 of the Act company officers who knowingly permit an employer to violate the Wage Act are deemed to be the employer and are personally liable for the pay.)

There was no question that the true employer in the case was an "Illinois employer": It was a limited liability company organized under Illinois law and it had its only business office in Illinois. The executive contended that he could not be personally liable unless he, too, was as an "Illinois employer," and he could not be an "Illinois employer" because he lived and worked outside Illinois and had virtually no physical contact with Illinois.

The Illinois Appellate Court rejected that contention and affirmed the judgment on the grounds, among others, that his duties as an officer of an Illinois company were sufficient to confer personal jurisdiction over him under our "long-arm" statute and bring him to trial on the question whether he knowingly permitted the true employer to violate the Wage Act.

The upshot is: In order for the Wage Act to apply at all, the true employer (or the employer-in-fact) must be an "Illinois employer," but only the employer-in-fact need be an "Illinois employer."

Right to Privacy - Social Networks

Prospective employers would be prohibited from asking job applicants to provide access information (e.g., user name, password) for social media outlets such as Facebook if legislation pending in the Illinois General Assembly becomes law. Maryland has already enacted a law which prohibits that practice, and bills now pending in Springfield would amend the Right to Privacy in the Workplace Act to ban requests for access information to social media. (HB3782, HB 5713).

FUNDAMENTAL DO'S AND DON'T'S OF THE HIRING PHASE

The hiring phase is complicated. Here are some of the basics of what may and may not be asked about and required during the hiring process.

Race, Sex, Age, Disability

Inquiries about race, gender, birthplace, religion, marital status and disability are prohibited with these exceptions. It is all right to identify the essential functions of the job and ask how the applicant would perform them, and also to ask whether the spouse of the applicant is an employee of the employer.

It is permissible to ask for the full name of the applicant and whether he or she has ever worked for the company under a different name, but impermssible to ask for a maiden name.

The applicant may be asked how long he or she has lived in the state or the city but not whether he/she owns or rents. The only question that can be asked about age is whether the applicant is at least 18 years old, and then only to determine whether the applicant is of legal age for employment.

A LEGITIMATE BUSINESS INTEREST ON THE PART OF AN EMPLOYER IS A PREREQUISITE FOR ENFORCEMENT OF A COVENANT NOT TO COMPETE AFTER ALL.

An employer who would enforce a covenant not to compete must establish that enforcement is necessary to protect a legitimate business interest. That has been the law in this State for a long time. But there had been some doubt about it since 2009, when the appellate court in Sangamon County held that all that mattered was that the covenant be reasonable in time and area. (Sunbelt Rentals Inc. v. Ehlers, 394 Ill.App.3d 421 (4th Dist. 2009)). The Illinois Supreme Court has just set the record straight about that. (Reliable Fire Equipment Company v. Arredondo et al., Docket No. 111871).

In so doing, the Court announced a totality-of-circumstances doctrine: The enforceability of a covenant not to compete must henceforth be determined on a case by case basis evaluating the totality of circumstances in the given case. The presence or absence of a legitimate business interest had hitherto turned on two questions: One, was there a misuse of confidential information? Two, was there a "near permanent" relationship between the employer and the customer?

The answer to both those questions was "no" when the Reliable Fire case was in the trial court (DuPage County) and the Appellate Court (Second District). So both of those courts refused to enforce the pertinent covenants not to compete.
Why, then, a different result in the Supreme Court? Because the Illinois Supreme Court may ignore its own precedents but our lower courts may not. Although there were no trade secrets and no "near permanent" customer relationships in the case, there was flagrant competition on the part of the defendants: While they were still in the employ of the plaintiff-employer, they were using company time and company resources to sell competing product to their employer's customers for their own account.

Employee or Independent Contractor?

by David McCarthy

As a rule an employer must withhold federal income tax, withhold and pay social security (FICA) and Medicare taxes, and pay unemployment tax (FUTA) on wage paid to an employee; but need not withhold or pay any federal taxes on payments to independent contractors.

The key to distinguishing an employee from an independent contractor is the degree or extent to which the employer has the right to control what will be done and how it will be done.

The price of guessing wrong can be a steep one.

One way to reduce or eliminate the risk is to ask the Internal Revenue Service for a determination. This is done by submitting IRS form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

At-Will Employment Rule

by David McCarthy

A young man walked in off the street the other day and provided living proof that for all its simplicity, the at-will employment rule is tough to grasp.

An employer to whom he had given three weeks' notice of his intention to quit told him to leave at once.

"Can they do that?" he asked.

Of course.

The point of giving prior notice is to allow the employer to adapt to the change. It does not alter the at-will nature of the relationship.

The Intolerable Co-Worker

by David McCarthy

We get a remarkable number of calls from persons who have inflated notions of "hostile environment harassment." Usually the caller is new to the job in question and the complaint is that a co-worker is curt, abrupt, abrasive, indifferent, quarrelsome, and on and on. Eventually the term "hostile environment" enters the conversation. Invariably the caller displays an unduly broad (and erroneous) notion of "hostile environment harassment."

It began 24 years ago when the U.S. Supreme Court expanded to scope of gender-based harassment from the so-called quid pro quo variety to the "hostile environment" variety. In order for the "hostile environment" to be actionable it must have the purpose or effect of unreasonably interfering with an individual's work performance or creating an intimidating, hostile, or offensive working environment and it must be connected to one of the forms of discrimination that is prohibited, e.g., race, sex, national origin, age, disability.

Quite recently a caller who had been let go after fewer than 60 days on the job had just received from EEOC (Equal Employment Opportunity Commission) her right to sue letter and a notice that, after investigation, EEOC was unable to conclude that the caller had been the victim of workplace discrimination. She brought her charges on a theory of race-based discrimination, and it soon became clear why: Both of the "villains" in her story were women. One was a supervisor and the chief complaint as to her was that she refused to take sides in an ongoing, low-grade clash between the caller and a co-worker with whom the caller did not get along.

From what was described to me, I concluded that the conduct complained of did not rise beyond a clash of personalities. Apparently EEOC had reached much the same conclusion after a long investigation. The caller was free to go to the next step, that is, file suit; but the wisdom of doing so in light of the tepid conclusions of the achingly-sensitive EEOC was far from clear.

Can Blogging Get You Fired?

by David McCarthy

Can blogging about your job or your boss get you fired?

Absolutely.

Illinois is an at-will State. Either party to the employment relationship can end it at any time for any reason.

By and by exceptions have emerged as to the right of the employer to end the employment relationship. To fire someone after she has complained of discrimination because of race, sex, age, or disability is to run the risk of liability for "retaliatory discharge."

As for blogging about the job or the boss, it is tempting to suppose that the constitutional guarantees of free speech diminish or eliminate the right of the employer to fire the blogger. But it is not so.

First, the constitutions regulate only the relationships between individuals and the national and state governments, not the relationships between individuals and private employers.

Second, the Illinois Supreme Court has expressly rejected the proposition that a claim for retaliatory discharge can be grounded on free speech. There is an exception when the free speech is of the "whistleblower" variety.

Otherwise, you can blog to your heart's content and no judge will prohibit it. But you take what comes, and if a "pink slip" is what comes, you might as well put all your attention on looking for a new job because you are going nowhere with a claim of retaliatory discharge.

More About the Work-At-Will Rule

Illinois is a work-at-will state. My advice to prospective clients who have just lost their jobs invariably begins with the proposition that the employment relationship is terminable at will by either party (employer or employee) at any time for any reason or for no reason.

Virtually all the action in employment law over the last 40 years has been in the development of exceptions to the general rule that the employer can terminate the employment relationship whenever it wants to.

Quite recently we received a query from an individual who had lost his long-time job with a national retailer after he was late reporting back to work from a trip overseas that was unrelated to his employment.

He had developed quite a good case to show that he had a good excuse for not getting back to work on time. But he was unable to identify any situation, circumstance or event which - in his case - diminished or eliminated the right of his employer to terminate the employment relationship.

Even if he had reported back to work exactly when and where required, his employer was nevertheless free to terminate the relationship. There are indeed situations in which an employer’s decision to end the employment relationship can fairly be challenged (e.g. discrimination on the basis of age, race, sex, disability).

In the case under discussion here, there was the faintest hint of discrimination on the basis of national origin, but my invitation to him to tell me more about that point went unaccepted.

All this presupposes that the employee does not have a contract for a specified period of time. If the employee does have a contract for employment for a specified period of time and the employer terminates the employement relationship before the period has expired, the termination may be (and often is) actionable on a basic, common law breach-of-contract theory.

DO I HAVE A RIGHT TO REVIEW MY PERSONNEL FILE?

By David McCarthy

Yes.
Current employees and some former employees are entitled to see their personnel file and to make a copy of it by authority of the Personnel Records Review Act, 820 ILCS 40/0.01 et seq. The question is often put by someone who has just been fired, and the right of access survives for one year following termination of the employment relationship.)

In general the employer must produce the file within seven working days of receiving a request therefor, and may not charge more for copies than the actual cost of the copies. Small employers (fewer than five employees) are not bound by the statute, and the statute does not require an employer of any size to maintain personnel records.

There is a right to correct the record.

It hardly needs saying that when the employer and the employee concur that the record is erroneous, it can be corrected by removal of the offending material, or otherwise, as they mutually agree.

What if they disagree?

In that instance, the employee is entitled to submit a written statement of his or her position, which must be attached to that part of the record it takes issue with, and any time the disputed portion is produced to a third party, the employee's position paper must be produced as well.

Records pertaining to disciplinary action may not as a rule be produced to third parties unless the employee has been notified. The employer must examine the file before producing it to third parties and must in most instances delete information about disciplinary matters that are more than four years old.

Do you get to see everything?

No.

Letters of reference are not subject to production. The same is true for personal information about someone other than the employee in question and for records pertinent to a criminal investigation.

SENIORITY OR DISABILITY: WHO GETS THE JOB?

by David McCarthy

Query: When an employee with seniority and an employee with a disability vie for the same job, who gets it?

Usually the employee with seniority, according to the U.S. Supreme Court.

In 1990 a man named Barnett injured his back while employed as a cargo handler by U. S. Airways Inc.. He invoked his own seniority rights to gain a less demanding position in the mail room. Two years later his position, among others, was opened to seniority-based employee bidding, and Mr. Barnett learned that two co-workers who were senior to him intended to bid for his positions.

Mr. Barnett proposed to U. S. Airways that it accommodate his disability by exempting his position from the seniority system. Ultimately the employer refused, Mr. Barnett lost his job, and he sued U. S. Airways on the grounds that it had discriminated against him in violation of the Americans With Disabilities Act ("ADA").

Summary judgment for the defendant-employer was reversed on appeal. Then the U. S. Supreme Court, in another 5-4 decision, reversed the Court of Appeals and remanded the case to the trial court.

The Court held that the accommodation requirements of the ADA do not oblige an employer to disregard its own seniority system unless the plaintiff-employee shows "special circumstances" warranting from the seniority system in that particular case.

What does a "special circumstance" look like?

The Court offered only one example, to wit, that of an employer who has so often exercised a unilateral right to make exceptions to its seniority system that one more exception will not matter. It is too soon to tell whether the seniority-is-trump rule will be swallowed up tby the "special circumstances" exception, but it is predictable

HOW DO YOU GET TENURE WHEN YOU HAVE NOT PUBLISHED? YOU SUE, OF COURSE.

by David McCarthy

There was a time when it was widely understood and accepted that tenure was conditioned on being published.

Interestingly, officials of the University of Wisconsin were sued for refusing (by a vote of 7 to 1) to grant tenure to an assistant professor of physical education who had published nothing. The contract of employment did not guarantee tenure, but only that plaintiff would be considered for tenure. The case was dismissed on dispositive pre-trial motions and the Seventh Circuit Court of Appeals affirmed the dismissal.

Plaintiff brought a claim under Title VII of the Civil Rights Act that alleged sexual discrimination in the form of "associational discrimination."

It contended, in gist, that tenure had been denied to plaintiff because of her association with a male employee of the university who had earlier filed a sex discrimination claim (and who also cast the only vote in favor of granting tenure to plaintiff). The Title VI claim was found to be time barred.

A claim predicated on denial of equal protection failed for want of evidence that plaintiff had been treated differently from similarly situated candiates for tenure and for want of evidence that the individual defendants were motivated by an intent to discriminate against persons such as plaintiff.

Plaintiff asserted that she was a class of one, a heterosexual female professor who befriended a heterosexual male professor who filed a sex discrimination complaint. However, she did not carry her burden of establishing that the defendant's justification for discriminating against her was irrational and arbitrary.

Finally, the Court rejected a claim that denial of tenure carried a stigma so great that at two different performance reviews prior to the time when plaintiff came up for tenure, the Dean had told her that publishing would be a "critical factor" in the tenure decision.

After the litigation commenced and after the defendants filed their motion for summary judgment, the response of plaintiff flagrantly disregarded local rules pertaining to statements of fact and citations of law. The trial judge therefore disregarded a large part of plaintiff's opposition. Plaintiff charged the trial judge with abuse of discretion. The Court of Appeals rejected that contention.

NIGHT-SHIFT DUTY IS NOT SEXUAL DISCRIMINATION

by David McCarthy

Being transferred from the day shift to the night shift does not constitute sexual discriminiation.

A woman grown accustomed to the day shift quit as soon as she had been transferred to the night shift and sued for "constructive" discharge on the grounds that any reasonable person would deem the change of shift unbearable.

The Seventh Circuit Court of Appeals affirmed summary judgement in favor of the defendant-employer on the grounds that transfer from day shift to night shift did not constitute an "adverse employment action."

The case is noteworthy for its rejection of the sexist position of the plaintiff.

She accused her boss of preying on her "wifely instincts": He knew she would resign rather than accept transfer to the night shift because she was a dutiful wife, caregiver in the home and not the principal breadwinner.

Or so the argument went.

The Appeals Court remarked that the plaintiff -- apart from having no evidence in support of her speculations -- was attempting to build a case on the very gender stereotyping which Title VII of the Civil Rights Act of 1964 was designed to eradicate from the workplace (Grube v. Lau Industries Inc. No. 00-4131, 7-19-01).

COVENANTS NOT TO COMPETE AND CONSIDERATION

by David McCarthy

Enforceable covenants not to compete are, like giant pandas, few and far between.

Why?

Because they are restraints on trade.

The law abhors restraints on trade, and therefore covenants not to compete will be scrutinized with care to ascertain whether they do or do not prevent competition per se. One object of this scrutiny is an element that is always indispensable to formation of a contract but usually a matter of indifference: consideration, or what might be more easily understood as quid pro quo, though the scholars cringe when the terms are used interchangeably. Consideration is the "great divide" of contracts, the element which separates promises that will be enforced from those that will not.

When the contract under examination is a covenant not to compete, the law will take pains to examine consideration for its presence and for its adequacy.

Often enough the consideration for a covenant not to compete is cast in terms of continued employment. Is that consideration? Yes but only when the employment continues for a "substantial" period of time following formation of the agreement. What is a "substantial" period of time? There are decisions holding that employment for more than two years following formation of the agreement qualifies as "substantial."

One way to eliminate the uncertainty as to whether the continued employment is or is not "substantial" is to offer a different form of consideration, namely, a definite and substantial sum of money that is over and above what would otherwise be the employee's due, e.g., $250.00.

Consideration is a necessary but not sufficient condition. Its absence is fatal to the existence of a contract but its presence does not, in and of itself, make the agreement enforceable. There would be further scrutiny to ascertain whether a legitimate and protectible business interest of the plaintiff-employer is at stake and whether the restrictions in the agreement in question exceed what is reasonably required to protect those business interests.

FALSE CLAIM BUYS RETALIATION CARD

By David McCarthy

Illinois is still a work at will state.

Put another way, the general rule was, and still is, that the employment relationsip is terminable at will by the employer or by the employee. The employer's right might be diminished or impaired by contract (e.g., a collective bargaining agreement) or by law. The fetters imposed by law on an employer's right to end the employment relationship at any time for any reason have been a hot topic for a long time. For years the fastest growing category of "employment-discrimination" claims has been not race, or sex. or national origin, but retaliation.


Small wonder.

A retaliation case is easy to manufacture, easy to prove, and it pays well. It starts by engaging in "protected activity" e.g., submitting to the boss a false and malicious claim that a co-worker and rival has committed sexual harassment will suffice if a true and honest complaint is unavailable. The law will repay the sociopath's mendacity by heaping rewards and protection on him or her.

A maliciously false complaint will gain for the employee the functional equivalent of a no-cut contract.

The employer who dares to end the employment relationship will be sued for retailiatory discharge, will be presumed guilty in most cases, and will be found guilty unless the presumption is perfectly overcome: the jurors possessed of Alan Alda sensibilities must be convinced that there was not even a tinge of retaliatory motive. Yet the more outrageous and unforgivable the complaint, the greater the chance that notions of "payback" figured in the decision to terminate.


It is not for nothing that claims of "retaliation" are a growth industry. If you believe this is an exaggeration, call us for details about the disgraceful state of the law.

ARBITRATION OF JOB DISCRIMINATION CLAIMS

by David McCarthy

Employees with claims against their employers for discrimination or otherwise can be enjoined from suing in court and compelled to go to arbitration if they have so agreed.

The U.S. Supreme Court recently ruled that an employee who filed a race discrimination suit against the national retailer which employed him was properly enjoined from prosecuting the suit and obligated to submit his claims to arbitration because he had agreed to do so in writing when he signed an application for employment.

A contract that requires arbitration of disputes rather than litigation is not illegal. The courts profess to welcome arbitration as an alternative to litigation. For fast decisions and low costs, arbitration has jury trials beat, and the rights and remedies of an employee are in no way diminished or impaired by arbitration.

So one might have expected a unanimous "yes" to the question whether the contract at issue was enforceable. In fact, the vote on the Supreme Court was 5-4, and the justices were aligned exactly as they had been in Bush v. Gore. (Circuit City v. Adams, No. 99-1379).