An Illinois law limiting the use of restrictive covenants and codifying existing case law around their enforcement takes effect January 1, 2022. Employers who have not yet reviewed their non-competition and non-solicitation agreements and policies and made necessary revisions should do so now to ensure their agreements will be valid and enforceable under the new law.
Income Thresholds for Restrictive Covenants
The sweeping legislation applies only to restrictive covenants entered into between employers and employees on or after January 1, 2022. The new law amends the existing Illinois Freedom to Work Act, which took effect in 2017 and prohibited the use of restrictive covenants for low-wage workers, who were defined as those making less than $13 per hour.
Greatly expanding the population of employees covered under the Freedom to Work Act, the new law prohibits non-compete agreements for any employee who earns or is expected to earn $75,000 or less per year. Non-compete covenants are defined as any agreement that restricts the employee from working for another employer for a specified period of time or within a specific geographic area or from performing similar work for another employer.
The new law also regulates non-solicitation agreements, which restrict a former employee from pursuing the employer’s clients, other employees, vendors and suppliers. Employers are precluded from binding employees earning $45,000 or less per year to non-solicitation covenants.
Earnings are defined to include salary, bonuses, commissions and any other form of taxable compensation, and both earnings thresholds are scheduled to increase in five-year increments through 2037.
Enforceability of Restrictive Covenants
The new law codifies existing case law by requiring that non-competition and non-solicitation agreements: (1) are supported by adequate consideration; (2) are ancillary to a valid employment relationship; (3) are no greater than required to protect the employer’s “legitimate business interests”; (4) do not impose any undue hardship on the employee; and (5) are not injurious to the public.
Embracing prior Illinois Appellate Court decisions, the Act defines “adequate consideration” to mean that either the employee worked for the employer for at least two years after signing the restrictive covenant or the employer provided consideration adequate to support the agreement.
The legislation also provides a non-exhaustive list of factors for courts to consider when assessing whether a restrictive covenant is properly construed to protect an employer’s legitimate business interest. This list includes:
- 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 through the employee’s employment;
- The time restrictions, the place restrictions; and
- The scope of the activity restrictions
However, the new statute explicitly recognizes that every situation must be determined on its own particular facts, such that the “same identical contract and restraint may be reasonable and valid under one set of circumstances and unreasonable and invalid under another set of circumstances.”
The law also empowers courts to alter overly broad restrictive covenants, a practice commonly referred to as “blue penciling.” Employers therefore must be careful to draft narrow restrictions and to only include those that are needed to protect their legitimate business interests.
Employers will also be required to advise employees in writing to consult with an attorney before agreeing to a restrictive covenant. Employers, then, must give their employees 14 days to review the proposed restriction. Non-competition and non-solicitation agreements that fail to meet these requirements will be deemed illegal and void.
The law includes special provisions for employees related to the COVID-19 pandemic. Specifically, non-competition agreements cannot be enforced against furloughed or laid off employees unless the agreement provides for payment of the employee’s base salary for a period of time.
Notably, the Act diverges from existing common law with its fee-shifting provision, which allows employees who defeat enforcement claims to recover all costs and reasonable attorney’s fees, thus penalizing employers who unsuccessfully attempt to enforce invalid non-competition and non-solicitation agreements. Further, the Illinois Attorney General is authorized to investigate and sue employers that violate the Act on a regular basis.
Review Agreements with a Litigation Attorney
Before the new law takes effect, employers are advised to consult with their attorney regarding their restrictive covenants and practices. It is also advisable for employers to review their agreements with a litigation attorney who is well-versed in restrictive covenants. The fact that courts are empowered to determine an agreement’s enforceability based on the facts and circumstances of the individual case portends future litigation for agreements that fall into a gray area. An attorney with expertise in restrictive covenant litigation can provide guidance on crafting agreements that will be enforceable – and will therefore shield the employer from potential liabilities while protecting the employer’s business interests.