The Illinois General Assembly passed a major bill on May 31, 2021, that further limits and clarifies the circumstances in which restrictive covenants can be enforced against Illinois employees. Governor J. B. Pritzker is expected to sign the bill into law.
A product of extensive negotiations between interest groups representing both employees and businesses, the new law imposes several unique regulations on agreements with covenants not to compete and covenants not to solicit.
The new law goes into effect January 1, 2022, and applies to agreements entered on or after that date.
Illinois initially regulated restrictive covenants with the Freedom to Work Act (2017), which outlawed “covenants not to compete” for “low-wage employees,” defined as those making legal minimum wage or less than $13.00 per hour, whichever is greater. It was unclear whether the law’s definition of “covenants not to compete” included covenants not to solicit customers or employees.
The new law will amend the Freedom to Work Act to clearly apply to both covenants not to compete and covenants not to solicit. This is a significant change, because other states that have recently regulated restrictive covenants generally have not expressly affected covenants not to solicit.
The new restrictions on covenants not to solicit would apply not only to provisions aimed at prohibiting solicitation of customers and vendors, but also the solicitation of employees. The law excludes certain types of agreements from the definition of a “covenant not to compete,” including confidentiality provisions, invention assignment agreements, and covenants entered in the context of the sale of a business, among others.
The new law will substantially expand the compensation threshold for enforceable restrictive covenants.
Under the new law, covenants not to compete will be invalid and unenforceable for employees with “actual or expected” earnings of less than $75,000 per year (inclusive of salary, bonuses, commissions, or any other form of taxable compensation). This threshold will increase on the following schedule:
Perhaps in recognition that covenants not to solicit are generally less burdensome on employees than covenants not to compete, the monetary threshold for these provisions is lower. Covenants not to solicit will be invalid and unenforceable for employees earning less than $45,000 per year (inclusive of salary, bonuses, commissions, or any other form of taxable compensation). These figures will increase as follows:
Since 2013, Illinois employers have operated under the rule established by the Illinois Appellate Court for the First District, First Division, in Eric Fifield and Enterprise Financial Group, Inc. v. Premier Dealer Services, Inc., 373 Ill. Dec. 379, 993 N.E. 2d 938 (Ill. App. Ct. 2013), requiring employers to provide employees with “at least two years or more of continued employment” as consideration for signing a restrictive covenant, if at-will employment itself (as opposed to some other benefit) is the consideration for the agreement. The Fifield decision is not without controversy: some courts have declined to apply the two-year Fifield rule.
The new law will end the controversy by codifying the Fifield two-year rule. If the employer does not provide “professional or financial benefits adequate by themselves” (i.e., some non-illusory benefit other than at-will employment), then “adequate consideration” is defined as “at least two years” of employment after signing the agreement.
Illinois employers should take note of this requirement before they entrust new employees with confidential information, trade secrets, or customer relationships.
In addition to codifying some well-established common law principles, the new law will address a novel concern. It will void covenants not to compete (but not covenants not to solicit) for employees furloughed or terminated due to business circumstances or governmental orders related to COVID-19 or under similar circumstances, unless the employee is paid base salary from the date of termination through the period of enforcement, minus compensation earned through subsequent employment during the enforcement period.
Judges have considered the impact of the COVID-19 pandemic in weighing the equities of injunctive relief in restrictive covenant cases. The new law will remove uncertainty regarding enforcement for employees who fit within the carve-out.
The new law contains provisions that are important for employers who intend to use and enforce restrictive covenants to protect their legitimate business interests. These include:
Given the statutory “blue pencil” factor, employers should consider including a provision in their restrictive covenants that confirm the parties authorize judicial reformation. The law still gives judges latitude in deciding against rewriting contracts that overreach.
Illinois employers should re-evaluate their needs and consider revising agreements to fit within the new legal requirements. Additionally, employers should continue to assess how they can further protect their legitimate business interests in other ways, such as strengthening internal safeguards for sensitive information, preparing a departing employee drill, and reviewing the incoming employee due diligence process.
The effective date of this new law is set for January 1, 2022. Two of its sections (limiting the use of non-compete clauses to employees earning at least $75,000 and non-solicit clauses to employees earning at least $45,000) are applicable only to contracts entered into after January 1, 2022. However, their existence raises questions as to the likelihood of contract enforcement with employees earning less than the threshold amounts prior to 2022.
We will continue to analyze these issues and explore their practical impact for employers.