Non-Compete News: Illinois Legislature Changes the Game on Non-Compete Agreements

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It’s no secret that Illinois courts have historically been less than friendly to restrictive covenants, and non-compete agreements in particular. On August 13, 2021, Governor JB Pritzker signed into law Public Act 102-0358, an amendment to Illinois’ “Freedom to Work Act,” which both codifies existing requirements under Illinois precedent, and imposes new restrictions on when, with whom, and under what circumstances Illinois will enforce non-compete and non-solicitation agreements.

The law takes effect on January 1, 2022, and will only apply to agreements entered into after that date. Employers with Illinois employees should review any existing employment agreements that include restrictive covenants now to determine whether 2021 revisions will best protect their interests and to ensure compliance with the new law for agreements in 2022 and beyond.

The Starting Whistle Blows

The Freedom to Work Act defines a “covenant not to compete” to include an agreement between an employer and employee:

  • that restricts the employee from performing any work for another employer for a specified period of time, or from performing work for another employer that is similar to the employee’s work for the employer who is party to the agreement; or
  • that imposes adverse financial consequences on a former employee if he/she/they engage in competitive activities after the termination of the employee’s employment with the employer.

Excluded from the definition are covenants not to solicit, confidentiality agreements, non-disclosure agreements covering trade secrets or inventions, invention assignment agreements, agreements related to the purchase or sale of a goodwill or ownership interest of a business, no rehire agreements, and agreements requiring advance notice of termination where the employee remains employed during the notice period.

Although the Act excludes “covenants not to solicit” from the definition of “covenant not to compete,” it does apply to non-solicitation covenants, as noted below. A covenant not to solicit is an agreement that restricts an employee from soliciting other employees for the purposes of employment with another entity, and/or restricts an employee from soliciting the employer’s customers or clients for the purpose of products or services (regardless of whether the solicitation is for a competing business or product) or otherwise interfering with the customer relationship.

Disqualified from the Start

The new law proscribes non-compete agreements and non-solicitation agreements in certain circumstances.

The Freedom to Work Act previously prohibited employers from entering into non-compete agreements with “low wage workers,” effectively defined to include anyone who earned under $13.00 per hour. With the amendments in the Act, employers may not enter into a covenant not to compete with any employee who earns (or is expected to earn) $75,000 or less per year, and may not enter into a non-solicitation agreement with an employee who earns (or is expected to earn) $45,000 or less per year. Notably, the Act defines earnings more broadly than base salary to include bonuses, commissions, and tips, as well as elements of an employee’s total compensation that may not be reflected on a W-2 such as contributions to a 401(k) or to a flexible spending or health savings account. For both non-compete agreements and non-solicitation agreements, the thresholds are scheduled to increase every five years until January 1, 2037, when the minimum annual earnings limits will be $90,000 for non-compete agreements and $52,500 for non-solicitation agreements.

The law also provides that covenants not to compete with individuals (a) covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act, and (b) employed in construction (except for management, engineering, design, architectural, or sales employees) are “void and illegal.”

Interestingly, the law further prohibits non-compete and non-solicitation agreements with “any employee who an employer terminates or furloughs or lays off as the result of business circumstances or governmental orders related to the COVID-19 pandemic,” or under circumstances similar to the pandemic. This provision does not appear to be limited by the earnings thresholds noted above. How business circumstances may be “related” to the pandemic is likely to remain an open question, even as the pandemic subsides at some point in the future.

Playing by the Rules

Where non-compete and non-solicitation agreements are allowed, to be enforceable, they must meet certain requirements:

  • The employee must receive adequate consideration. The law defines “adequate consideration” as either (1) the employee worked for the employer for at least two years after the employee signed a covenant not to compete or covenant not to solicit; or (2) “consideration adequate to support an agreement not to compete or not to solicit,” consisting of “a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.”
  • The agreement must be ancillary to a valid employment relationship.
  • The agreement must be no more restrictive than required for the protection of the employer’s legitimate business interest.
  • The agreement may not impose undue hardship on the employee.
  • The agreement may not harm any public interest.

The above requirements are not entirely new, as they have been part of Illinois court precedent for some time. For example, the Act partially codifies the 2013 decision in Fifield v. Premier Dealer Services, Inc., in which an Illinois appellate court held that absent (undefined) consideration, an employee must remain employed for two years for continued employment to constitute adequate consideration for any post-employment restrictive covenant. Under Fifield, if an employee subject to a non-compete agreement voluntarily left employment prior to two years, and no other consideration had been paid, the restrictive covenant was unenforceable. Unfortunately, this Act contains no provisions for a court to address that situation and will still leave employees free to compete at will with no restriction or to leverage significant additional sums from employers lest they lose their competitive advantage. Going forward under the Act, if an employer wishes to enforce any restrictive covenant against a departing employee but did not provide other consideration at the outset of employment, such as an undefined amount of money or additional “professional” benefit of value, the employer will still have to provide additional consideration at the conclusion of employment to ensure enforceability. We note that the additional consideration need not be monetary, but employers should be prepared to establish any “professional” benefits the employee received in order to avoid a court finding an agreement unenforceable for lack of “adequate consideration.” There is no guidance in the law as to any formula that would be used to make this determination; but the definition of “adequate consideration” seems to indicate that if an employer provides some sort of financial or professional benefit at the outset of employment and the employee works for some period of time less than two years, even if the financial or professional benefit is not adequate to support the restrictive covenant on its own, the agreement may be enforceable.

The Act also borrows from existing precedent to instruct courts regarding the factors to be considered in evaluating whether a covenant not to compete or covenant not to solicit is reasonable in light of an employer’s legitimate business interest(s). In evaluating whether a “legitimate business interest” exists, courts are to consider “the totality of the facts and circumstances of the individual case,” including such factors as:

  • 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;
  • time and place restrictions and the scope of any activity restrictions.

As helpful as the guidance above may have been had it stopped there, the legislature also emphasized that the above factors are not the only ones that can be considered; that no single factor is to be controlling or given extra weight; that the determination is to be guided by all of the surrounding circumstances; and (in what may be the least helpful statutory language ever) that “[t]he 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 new statute appears to merely summarize the body of case law regarding reasonable restrictions and legitimate business interests, but it provides no guidance regarding matters such as what constitutes a near-permanent customer relationship, whether activity restrictions should be limited to activity that is the same or similar as the activity the employee performed for the party employer, or timing and extent of exposure to customers and other employees of the party employer. Those matters—often at the heart of enforceability concerns—remain up to the discretion of the courts, to be decided on a case-by-case basis.

The Act imposes the following, comparatively clear, new rules as well:

  • Employers must provide at least 14 calendar days for the employee to review the provisions; and
  • Employers must advise employees in writing to consult with an attorney before entering into the agreement.

Running Up the Score

Enforcement actions will take on considerable additional risk, in that employees who prevail in such actions (whether brought as a complaint or counterclaim by the employer) will be able to recover reasonable attorneys’ fees and costs in addition to any remedies available pursuant to the agreement. There are no restrictions in the Act that would prevent an employer from including a provision requiring the employee to pay attorney’s fees if the employer is successful.

Additionally, the law gives the Illinois Attorney General the power to conduct an investigation and bring an enforcement action where it “has reasonable cause to believe that any person or entity is engaged in a pattern and practice prohibited by” the Act. The Attorney General may obtain monetary damages, restitution, injunctive relief, and civil penalties of up to $5000 for a violation and up to $10,000 for each repeat violation within a five-year period. Each violation for each person subject to an agreement that violates the Act is considered a separate violation.

Preparing Your Team

One of the few aspects of the law that appears to be relatively employer-friendly is the exclusion of “garden leave” type of agreements that mutually require the employer and employee to provide notice prior to separation, pursuant to which the employee remains a paid employee (but does not work) for the duration of the notice period. Such arrangements, in theory, bench an employee about whom an employer has concerns with respect to competition, but do not involve the same complexities with respect to protection of legitimate business interests, consideration, or reasonableness of restrictions. Going forward, Illinois employers may want to evaluate such agreements as an alternative to non-compete agreements.

Employers should also be mindful that this law applies to both former and current employees such that without an enforceable agreement, nothing prohibits even current employees from competing against employers while they are still employed. Therefore, unless and until the full consideration for a covenant not to compete or covenant not to solicit has been paid or provided, such covenants will remain unenforceable. For example, if a non-compete or non-solicitation agreement relies solely on two years of continued employment for consideration, until the employee has worked for the employer for two years after signing the agreement, the employee is free to engage in competitive employment or to solicit customers or employees. Thus, we recommend that employers also review their existing confidentiality, non-disclosure, and invention assignment agreements to ensure that their confidential and proprietary information, intellectual property, and trade secrets remain protected.

In any event, Illinois employers should begin reviewing any agreements or other forms that include restrictive covenants, including but not limited to employment agreements, offer letters, compensation packages, incentive plans, and separation or severance agreements. At a minimum, employers need to update such documents that will be entered into in 2022 to include language:

  • advising employees to consult counsel;
  • providing the 14-day review period discussed above;
  • authorizing courts to reform the agreement; and
  • documenting “adequate consideration.”

Employers may also want to consider whether to have current Illinois employees sign new, renewed, and/or updated non-compete and non-solicitation agreements prior to the end of 2021 to avoid those agreements being subject to the Act. Of course, any revised agreement in late 2021 will restart the two-year timeclock for continued employment as consideration and that must be considered as well.

Employers should also evaluate their practices that may impact enforceability under the Act. For example, employers need to ensure that they allow for the full 14-day review period before requiring employees to sign non-compete and non-solicitation agreements. Employers should also consider how to determine whether an employee’s total earnings meet the monetary thresholds for coverage by the Act and whether they have been provided all consideration promised in support of the agreement at issue. Finally, the Act’s prohibitions mean that robust confidentiality and non-disclosure agreements with heightened monitoring provisions are even more important than before.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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