Unraveling the New (Major) Illinois Restrictive Covenant Law

Saul Ewing Arnstein & Lehr LLP
Contact

Saul Ewing Arnstein & Lehr LLP

On May 31, 2021, both Houses of the Illinois legislature unanimously passed legislation that, if signed by Governor Pritzker, will overhaul the enforceability of restrictive covenants in Illinois. The legislation1 amends the Illinois Freedom to Work Act and, if signed, will be effective January 1, 2022.  The proposed new law contains specific provisions that dictate when and how covenants not to compete and covenants not to solicit are enforceable.  All bets are in favor of the Governor signing the new law and employers and employees alike should therefore prepare now.

Restrictive covenants generally refer to restrictions on employees both during and after the employment relationship and include confidentiality, non-disclosure, non-compete and non-solicitation covenants.  The new proposed law materially changes the enforceability of two specific types of restrictive covenants -- non-compete provisions and non-solicitation provisions.  The below lays out the nuts and bolts of those changes.  

Non-Compete Agreements

The new law would prohibit covenants not to compete unless the employee's actual or expected annualized rate of earnings exceeds $75,000 per year.  This threshold increases to $80,000 per year beginning on January 1, 2027, $85,000 per year beginning on January 1, 2032, and $90,000 per year beginning on January 1, 2037.  Earnings include salary, bonuses, commissions or other form of taxable compensation.  Covenants not to compete specifically include agreements that impose adverse financial consequences if the employee competes after the termination of his or her employment with the employer.  While there are existing earnings thresholds now, the new law significantly extends those and will cover many more employees.

There are specific exclusions from the definition of covenants not to compete, including: 

  1. Covenants not to solicit (which are covered separately in the legislation);
  2. Confidentiality agreements or covenants;
  3. Covenants or agreements prohibiting the use or disclosure of trade secrets or inventions;
  4. Invention assignment agreements or covenants;
  5. Covenants or agreements entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest;
  6. Clauses or agreements between an employer and an employee requiring advance notice of termination of employment, during which notice period the employee remains employed by the employer and receives compensation; or
  7. Agreements by which the employee agrees not to reapply for employment to the same employer after termination.

Non-Solicitation Agreements

Similar to the changes for non-compete provisions, there are also earning thresholds for the enforceability of non-solicitation provisions.  The new law would prohibit covenants not to solicit unless the employee’s actual or expected annualized rate of earnings exceeds $45,000 per year.  This threshold increases to $47,500 per year beginning on January 1, 2027, $50,000 per year beginning on January 1, 2032, and $52,500 per year beginning on January 1, 2037.  A covenant not to solicit is defined as an agreement that prohibits an employee from trying to hire the employer’s employees or which restricts the employee from soliciting the employer’s clients, prospective clients, vendors, prospective vendors, suppliers, prospective suppliers, or other business relationships.

COVID-19 or Pandemic-Related Terminations

Not to be left out, there is also a provision in the legislation prohibiting an employer from entering into either a covenant not to compete or a covenant not to solicit with any employee “who an employer terminates or furloughs or lays off as the result of” COVID-19 or circumstances similar to the pandemic unless the employee is compensated equivalent to the employee’s base salary at the time of termination for the period of enforcement minus compensation earned through subsequent employment during the enforcement period.  This provision is a bit perplexing from an implementation standpoint as, presumably, the COVID-19 crisis as we know it today will likely be over as of the effective date of the law and would therefore be referring to some other future pandemic.  However, implicit in this provision is the growing trend around the country that unilateral terminations of employees by employers through no fault of the employee may impact the enforceability of non-competition and non-solicitation covenants. Additionally, this provision makes clear that, in order to enforce such restrictions when the employee is terminated for pandemic-related reasons, the employer essentially must keep employees on the payroll during the entire period of the restriction period and hope the employee gets another job.  The legislation is silent on the employee’s obligation to seek and accept employment.

Collective Bargaining Agreements

The legislation also clarifies that a covenant not to compete is void and illegal with respect to individuals covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act, as well as individuals employed in construction, except that construction employees who primarily perform management, engineering or architectural, design, or sales functions for the employer or who are shareholders, partners, or owners in any capacity of the employer.  This is an absolute prohibition not related to an employee’s earnings as discussed above.   

Elements of An Enforceable Restrictive Covenant

The new legislation codifies some of the existing elements in Illinois necessary to enforce a restrictive covenant, including those issues (such as adequate consideration) where there may be variations around Illinois courts.  Specifically, restrictive covenants 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;

    (4) the covenant does not impose undue hardship on the employee; and

    (5) the covenant is not injurious to the public. 

These are essentially the current common law considerations except now the “undue hardship” and “injurious to the public” elements are elevated.  Unfortunately, “undue hardship” and “injurious to the public” are not terms defined in the legislation.  Accordingly, whether these elements can be met will likely be factual determinations in court. 

Adequate consideration is defined in the legislation and means (1) the employee worked for the employer for at least two years after the employee signed an agreement containing a covenant not to compete or a covenant not to solicit, or (2) the employer otherwise provided 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.  The legislation does not provide examples of what “professional or financial benefits” are adequate, but this language essentially codifies the Illinois court’s decision in Fifield2 as requiring something in addition to hiring and normal salary and benefits in order to enforce a covenant not to compete or covenant not to solicit within the first two years of an employee’s employment. 

New Notice Requirements

Following the trend in some other states, in order for a covenant to be enforceable, an employer must give the employee advance written notice of the covenant and an opportunity to consider its implications.  The written notice must: (1) advise the employee to consult with an attorney before entering into the covenant, and (2) include a copy of the covenant at least 14 calendar days before the commencement of the employee's employment or provide the employee with at least 14 calendar days to review the covenant. An employer is in compliance with this provision even if the employee voluntarily elects to sign the covenant before the expiration of the 14-day period.  Practically speaking, if the employee starts right away, he or she would still have time to consider signing the covenant.  If the employee does not sign the covenant, it appears that the employee may be terminated but the covenant would not be enforceable.

Employee’s Attorneys’ Fees

Another significant aspect of the legislation is that, in the event an employee prevails in fighting an employer’s effort to enforce a covenant, the employee can recover attorneys’ fees.  This fixes the unfairness of contracts usually prepared by the employer where only the employer can recover attorneys’ fees as the prevailing party.

Blue Penciling

The state of the law regarding a court’s right to reform, modify or “blue pencil” an unenforceable covenant to make it enforceable effectively remains the same in that such provisions are permissive.  This means that courts have the discretion to modify overly broad covenants but, as before, employers should be cautioned not to rely upon such provisions as courts, in our experience, are increasing resisting to such requests. 

Illinois Attorney General Action

The legislation also gives the Illinois Attorney General the power to obtain monetary damages, restitution, equitable relief and civil monetary penalties not to exceed $5,000 for each violation or $10,000 for each repeat violation within a five-year period.  As a result, as of the Effective Date of the law, employers will need to ensure they are in full compliance with it with respect to restrictive covenants entered into after that date or run the risk of additional governmental claims.  

Effective Date

If signed into law by the Governor, the legislation will be effective on January 1, 2022.  Significantly, it applies to covenants not to compete and covenants not to solicit entered into after that date.  Therefore, as the legislation is currently drafted, existing covenants would not be impacted by this law.  However, some interesting questions are unanswered and will need to be clarified by regulation, such as are existing restrictive covenants grandfathered indefinitely or will new limitations apply when the contract is revised or automatically renewed?

Next Steps for Illinois Employers

If signed by the Governor, which seems likely, as of January 1, 2022, employers will have to update their practices regarding when to seek non-compete or non-solicitation provisions for new and existing employees, as well as to update their forms and procedures to address some of the new notice and other requirements in the law.  Additionally, Illinois employers will need to reset their expectations on which employees will be subject to such covenants and, if that is not an option anymore, to implement non-contractual, internal safeguards to limit the damage a departing employee can make when leaving to work for a competitor.  They may also need to be prepared to pay for the right to enforce a covenant, both at the execution of the covenant and potentially after the relationship ends and during the restrictive covenant period.    

 [TEJ1]https://www.ilga.gov/legislation/fulltext.asp?DocName=10200SB0672ham001&...

 [TEJ2]https://scholar.google.com/scholar_case?case=13527173503952234778&q=fifield+premier+dealer+services&hl=en&as_sdt=6,39

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.

© Saul Ewing Arnstein & Lehr LLP | Attorney Advertising

Written by:

Saul Ewing Arnstein & Lehr LLP
Contact
more
less

Saul Ewing Arnstein & Lehr LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.