Effective January 1, 2022
Governor Pritzker signed an amendment into law on August 13, 2021, which limits an employer’s ability to restrict former employees’ ability to compete or solicit post-employment. The amendment imposes new restrictions on covenants not to compete and non-solicitation restrictions for Illinois employees. The law takes effect on January 1, 2022, and is not retroactively applied to restrictive covenants entered into prior to that date. This summary identifies the key provisions to take note of in the Illinois Freedom to Work Act (820 ILCS § 90) (the “Act”).
Minimum Compensation Levels
- Employers are prohibited from entering into non-competition agreements with employees if the employees earn $75,000 per year or less. The salary threshold increases every five years (beginning in 2027) by $5,000 until it reaches $90,000 on January 1, 2037.
- Employers are prohibited from entering into non-solicitation (of employee and customer) agreements with employees earning $45,000 per year or less. The salary threshold increases every five years (beginning in 2027) by $2,500 until it reaches $52,500 on January 1, 2037.
- The Act defines “earnings” broadly to include: salary; earned bonus; earned commission and other forms of taxable compensation; and any amounts contributed in support of employee benefits.
Adequate Consideration Required
Enforceable restrictive covenants in Illinois must be supported by adequate
consideration. Continued at-will employment alone is insufficient consideration to support restrictive covenants if the employment lasts for less than two years. To constitute sufficient consideration, continued employment must last at least two years after the employee signed the restrictive covenants. Alternatively, the employer can provide other adequate consideration such as “a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.” 820 ILCS 90/5.
Reasonableness of Restrictive Covenants
Each situation must be determined on its own facts – the same restriction may be reasonable under one set of circumstances and not reasonable under another. A restrictive covenant is only reasonable so long as it is no greater than required for the protection of a legitimate business interest of the employer. A totality of circumstances and facts should be considered when making this determination, including: exposure to employer’s customer relationships or employees; near-permanence of customer relationships; the employee’s acquisition, use, or knowledge of confidential information through the employee’s employment; and time, place and scope of activity restrictions.
Informed Consent – Consult Attorney
The non-competition and non-solicitation agreements will be deemed illegal unless the employer advises its employees in writing to consult with an attorney prior to signing the agreement. Employees must be given at least 14 days to review the agreement; however, employees have the option of signing before the end of the 14-day period.
COVID-19 Related Separations
The Act prohibits enforcement of non-compete agreements with employees whom an employer terminated, furloughed, or laid off as due to business circumstances or governmental orders related to COVID-19 or circumstances like the COVID-19 pandemic. An exception to this is if enforcement of the covenant not to compete includes compensation 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.
Collective Bargaining Agreements
Non-compete agreements entered into after January 1, 2022, are 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. The Act also bars agreements for individuals in the construction industry, except for those employees primarily in management, engineering, architectural, design, or sales functions, or those who are owners or shareholders of construction businesses.
Attorney’s Fees
Any employee who prevails on a claim filed by their employer unsuccessfully seeking to enforce a restrictive covenant can recover all costs and reasonable attorney’s fees from the employer regarding the claim.
Collective Bargaining Agreements
The Act bars courts from “extensive judicial reformation” of restrictive covenants but allows a court, in its discretion, to choose to reform or sever provisions of a restrictive covenant rather than rendering it unenforceable. Factors a court may consider in reforming restrictive covenants include: the fairness of the restraints as initially written; whether the original restriction reflected 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 allowing for modifications in their agreement. The best practice is to include provisions allowing courts to “blue pencil” or reform any unenforceable provision.
Attorney’s Fees
Any employee who prevails on a claim filed by their employer unsuccessfully seeking to enforce a restrictive covenant can recover all costs and reasonable attorney’s fees from the employer regarding the claim.
Reforming Restrictive Covenants
The Act bars courts from “extensive judicial reformation” of restrictive covenants but allows a court, in its discretion, to choose to reform or sever provisions of a restrictive covenant rather than rendering it unenforceable. Factors a court may consider in reforming restrictive covenants include: the fairness of the restraints as initially written; whether the original restriction reflected 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 allowing for modifications in their agreement. The best practice is to include provisions allowing courts to “blue pencil” or reform any unenforceable provision.
Exceptions
The following are not considered non-compete agreements: confidentiality agreements; covenants prohibiting use or disclosure of company trade secrets or inventions; agreements entered into by person selling or acquiring an ownership interest in a business; advance notice of termination clauses (during which notice period the employee remains employed and receives compensation); and an agreement that an employee does not reapply for employment by the same employer after termination.
Enforcement of Act
The Act allows the Illinois Attorney General to bring a lawsuit against an employer if it is believed they are engaging in a prohibited “pattern and practice” under the Act.
