Earlier this year Governor Pritzker signed an amendment to the Illinois Freedom To Work Act, adding several limitations on the enforceability of covenant not to compete and non-solicitation agreements in Illinois. Known as Senate Bill 672, the new law is creating a variety of new issues for employers. Here is a general overview of what you need to know:
What businesses are affected by these Non-Compete limitations?
All employers who are based in or operating out of Illinois, or who employ Illinois residents.
Does the new Illinois Freedom To Work Act impact agreements aigned before 2022?
No. The new provisions only apply to restrictive covenant agreements entered after January 1, 2022; it does not apply retroactively to contracts entered before January 1, 2022.
What changed?
Among the restrictions contained in the new law are:
- Employer cannot require employees with actual or expected annual “earnings” of less than $75,000 per year to sign a “covenant not to compete”. The earnings limit increases $5,000 every five years for the next fifteen years (to $80,000 in January 2027, $85,000 in 2032 and then to $90,000 in 2037). Previously the Act only prohibited restrictive covenants for employees who made less than $13.00 an hour.
- Employer cannot require employees with actual or expected annual earnings of less than $45,000 per year to sign a “covenant not to solicit”. The earnings limit increases by $2,500 every five years over the next fifteen years (to $47,500 in January 2027, $50,000 in 2032 and then to $52,500 in 2037).
- Covenants not to compete or not to solicit become void and illegal if the employer terminates, furloughs, or lays off the employee for reasons related to the COVID-19 pandemic.
- Makes a covenant not to compete void and illegal with respect to employees covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act, and individuals employed in contracts. (There are exceptions for certain construction employees.)
The new Act also made changes to the definition of some key terms. Before we go into more of the changes, it’s important that we clarify some of the terms being used.
What is a “Covenant Not to Compete”?
It’s essentially a non-compete agreement. The new law expands the definition of “covenant not to compete” to include any agreement that places adverse financial consequences on the employee if the employee engages in competition activities after termination.
The new law does expressly exclude certain types of agreements or clauses from the definition, including confidentiality agreements, agreement prohibiting use or disclosure of trade secrets or inventions, and invention assignment agreements.
What is a “Covenant Not to Solicit”?
The new law amends the definition of “covenant not to solicit” to include a restriction on solicitation for employment of the employer’s employees as well as soliciting for the purpose of selling products or services of any kind or interfering with the employer’s relationships with clients, prospective clients, vendors, prospective vendors, suppliers, and prospective suppliers.
What is included in “Earnings”?
“Earnings” means the compensation, including earned salary, earned bonuses, earned commissions, or any other form of taxable compensation, reflected or that is expected to be reflected as wages, tips, and other compensation on the employee’s IRS Form W-2 plus any elective deferrals not reflected as wages, tips, and other compensation on the employee’s IRS Form W-2, such as, without limitation, employee contributions to a 401(k) plan, a 403(b) plan, a flexible spending account, or a health savings account, or commuter benefit-related deductions.
What are the other new limitations on Non-Competition and Non-Solicitation Agreements?
The new law also makes a covenant not to compete or not to solicit void and illegal, unless:
- the employee receives “adequate consideration”
- the covenant is ancillary to a valid employment relationship;
- the covenant is no greater than is required for the protection of a “legitimate business interest of the employer”
- the covenant does not impose an undue hardship on the employee; and
- the covenant is not injurious to the public.
More definitions? Yes, let’s break those down.
What is “Adequate Consideration”?
The new law defines “adequate consideration” as the employee either working for the employer for 2 years after signing the covenant not to compete or not to solicit or being provided consideration adequate to support the covenant. While the act clarifies that “consideration adequate to support the covenant” can be a period of employment plus additional professional or financial benefits or merely additional professional or financial benefits for agreeing to sign, it doesn’t give guidance on how much these “additional benefits” need to be to satisfy this definition. Unfortunately, we’ll have to watch and see how the courts treat this one.
What is a “Legitimate Business Interest”?
Again, here the new law doesn’t give us much information, just saying that it is determined based on the totality of facts and circumstances with some listed examples. Under a “totality of the circumstances” review, all of the facts and circumstances related to the restrictive covenant and the employee/employer relationship are reviewed by the court and taken into considering when ruling upon the enforceability and scope of the applicable restrictive covenant agreement.
What else does the new Illinois Freedom to Work Act do?
No, sadly we are not done yet. There’s more.
- New conditions.
The new law creates 2 new conditions to the legality and enforceability of a covenant not to compete and a covenant not to solicit. Before either can be enforceable, the employer must:
- advise the employee in writing to consult an attorney before entering into the covenant; and
- provide the employee with at least 14 calendar days to review the covenant (though the employee may voluntarily sign before the 14 days have expired).
- Employees can recover Attorney Fees.
The new law also includes a fee shifting provision which allows employees to recover their costs, including reasonable attorney’s fees and other damages as determined by the court if the employer attempts to enforce a restrictive covenant agreement and loses (meaning the employee wins).
- Administrative Audit.
The Law also specifies that the Illinois Attorney General has the authority to initiate or intervene if the Attorney General believes the employer is engaged in a pattern or practice prohibited by the Law, and grants the Attorney General investigative authority and the right to impose remedies and sanctions for those found in violation.
What do Employers Need to Do to comply with the Illinois Freedom to Work Act?
There are two key take aways from this article, Employers need to:
- Review your non-compete and non-solicitation language to make sure you comply with the conditions of the Act.
- Review your policies related to who you require sign non-compete and non-solicitations agreements to make sure you are not violating the Act.
Should you have any questions about Non-Competition, Non-Solicitation or other restrictive covenants or the Illinois Freedom to Work Act, please contact Navigant Law Group, LLC at (847) 253-8800 or contact us online.
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