Major Changes to Illinois’ Non-Compete and Non-Solicit Laws: Company Agreements Likely Require Revision
As of January 1, 2022, Illinois employers are more limited in their ability to bind employees to non-competition and non-solicitation agreements. These changes stem from a recent amendment to the Illinois Freedom to Work Act, Illinois Senate Bill 672 (the Amendment). The Amendment codified several limitations around restrictive covenants, including non-compete and non-solicit agreements, which were previously only addressed by judicial decisions. The Amendment also imposed new hurdles around non-competes and non-solicits. These changes, which are outlined below, apply to non-competes and non-solicitation agreements entered into on or after January 1, 2022.
Minimum Salary Requirements for Non-Competes and Non-Solicits
Previously, Illinois law prohibited employers from entering into non-compete agreements with employees who earn $13 per hour or less. As amended, the Freedom to Work Act prohibits non-compete agreements for employees earning $75,000 per year or less. The Amendment likewise prohibits customer and co-worker non-solicit agreements for employees earning $45,000 per year or less. The salary threshold will increase to account for inflation through 2037. For non-competes the thresholds will increase as follows: $80,000 by January 1, 2027; $85,000 by January 1, 2032; and $90,000 by January 1, 2037. For non-solicits, the threshold will increase as follows: $47,500 in 2027; $50,000 in 2032; and $52,500 in 2037.
Non-Competes Generally Prohibited Within Construction Industry and With Unionized Workers
With limited exception, the Amendment to the Freedom to Work Act prohibits non-compete agreements for workers in the construction industry generally. However, non-competes may be used for those workers within construction whose primary duties include management, engineering, architectural design, or sales. Those who are shareholders, partners, or owners of a company in the construction industry also may be asked to sign non-competes.
The Amendment additionally prohibits non-competes for individuals covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act.
Employees Must Be Advised to Consult Counsel and Be Given 14 Days to Sign
The Amendment requires that employees being asked to sign a non-compete or a non-solicit must be given at least 14 calendar days to review the agreement. Employers also must advise employees in writing to consult with counsel before signing the agreement. Failure to comply with these conditions will render the Agreement illegal and void.
Adequate Consideration Must Support Non-Competes and Non-Solicits
For a non-compete or non-solicit to be enforceable, it must be supported by valid consideration. Generally speaking, consideration is something of value provided to an employee in exchange for signing an agreement. What constitutes adequate consideration has been a subject of much debate in recent years. The Amendment to the Freedom to Work Act defines “adequate consideration” to mean: (1) two years of employment after the employee signs the non-compete or non-solicit; or (2) other “consideration adequate to support an agreement to not compete or to not solicit, which consideration can consist of a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.”
While “professional or financial benefits” is not defined under the new law, experience dictates that such benefits typically include a raise, a bonus, an equity award, a promotion, specialized training, and educational benefits.
Employers Must Have Legitimate Business Interests in Need of Protection
The Amendment also codifies the requirement that a restrictive covenant must be supported by a legitimate business interest. As before, such interests typically include protection of an employer’s trade secrets or customer relationships. The Amendment provides that when determining whether a legitimate business interest exists, “the totality of the facts and circumstances of the individual case shall be considered” and “each situation must be determined on its own particular facts.” Relevant factors include the employee’s exposure to the employer’s customer relationships or other employees; the near permanence of customer relationships; the employee’s acquisition, use, or knowledge of confidential information; and the time, place, and scope of restrictions.
Additional Mandatory Requirements for Enforcement
Codifying into law requirements that were previously set forth in judicial decisions, the Amendment provides that non-compete and non-solicit agreements are illegal and void unless: (1) the employee receives adequate consideration, (2) the covenant is ancillary to a valid employment relationship, (3) the covenant is no greater than is required for the protection of a legitimate business interest of the employer (discussed below), (4) the covenant does not impose undue hardship on the employee, and (5) the covenant is not injurious to the public.
Blue Penciling Authorized
While the Illinois Freedom to Work Act, as amended, cautions against wholly rewriting non-competes, it states that courts have discretion to choose to reform or sever non-compete and non-solicit provisions rather than holding them unenforceable as a whole. Relevant factors in determining whether judicial reformation is appropriate include the fairness of the restraints as originally written, whether the original restriction reflects a good-faith effort to protect a legitimate business interest of the employer, the extent of such reformation, and whether the parties included a clause authorizing reformation in the agreement. For this reason, including a blue penciling provision in any restrictive covenant agreement will continue to be important.
Restrictions Related to COVID-19
The Amendment also restricts employers’ ability to enter into restrictive covenants with employees who are terminated, laid off, or furloughed due to the COVID-19 pandemic or similar circumstances. It provides that restrictive covenants with such employees are prohibited unless enforcement includes compensation equivalent to the employee’s base salary at termination for the period of the enforcement, minus compensation the employee earns through subsequent employment.
Certain Agreements Are Exempt
The Amendment to the Freedom to Work Act makes clear that it does not apply to the following types of agreement:
- Confidentiality agreements.
- Agreements prohibiting the use or disclosure of trade secrets.
- Invention assignment agreements.
- Garden leave clauses (agreements whereby an employee leaving a job—having resigned or otherwise had their employment terminated—is instructed to stay away from work during the notice period, while still remaining on the payroll).
- Restrictive covenants entered into as part of a business acquisition or sale, including acquiring or disposing of an ownership interest in a business.
- Agreements where an employee agrees not to reapply for employment to the same employer after termination.
Attorneys’ Fees and Enforcement Options
In addition to the remedies available under the restrictive covenant agreements themselves, the Amendment provides that an employee may recover his or her reasonable attorneys’ fees if the employee prevails in a claim filed by an employer seeking to enforce a non-compete or non-solicit agreement.
The Amendments permits the Illinois Attorney General’s Office to file or intervene in litigation where there exists “reasonable cause to believe that any person or entity is engaged in a pattern and practice prohibited by law.” The attorney general is also empowered to investigate potential violations and to request a civil penalty in litigation.
Revise Non-Competes and Non-Solicits With Counsel to Ensure Compliance
Due to the number of significant changes mandated by the Amendment to the Freedom to Work Act, companies should work with legal counsel to bring their non-competes and non-solicits into compliance with this new law. Failure to do so could render many agreements void as a matter of law.
© 2022 Perkins Coie LLP