On August 13, 2021, Illinois Governor J.B. Pritzker signed into law an amendment to the Illinois Freedom to Work Act, which will impact the enforceability of some non-competition and non-solicitation restrictive covenants in Illinois. Although the new law will not impact all restrictive covenants in Illinois (the amendment excludes from its scope restrictive covenants entered into ancillary to the sale of a business, for example), anyone who requires employees to sign non-compete or non-solicitation clauses should carefully review their form agreements to ensure that they comply with the new law’s requirements. Below are some of the key changes and updates to the law in Illinois.
1. Salary Thresholds
The law prohibits employers from entering into non-competition agreements with employees who earn $75,000 or less per year and also prohibits employers from entering into non-solicitation agreements with employees who earn $45,000 per year or less.
For non-compete agreements, the salary threshold amounts will increase every five years by $5,000 until January 1, 2037, when the amount will equal $90,000. For non-solicit agreements, the salary threshold amounts will increase every five years by $2,500 until January 1, 2037, when the amount will equal $52,500.
2. Notice and 14-Day Review Period Requirements
Starting January 1, 2022, for a non-compete or non-solicitation provision to be enforceable (regardless of the employee’s compensation levels) the employer must (i) advise the employee in writing to consult with an attorney before entering into the covenant and (ii) provide the employee with a copy of the agreement at least 14 days before the employee’s employment begins or otherwise provide the employee with at least 14 days to review the restrictive covenant agreement.
3. Employee-Friendly Fee-Shifting Provisions
Most employer-drafted non-competition and non-solicitation agreements contain provisions providing that the employee agrees to pay for the employer’s attorneys fees and costs in the event that the employer sues to enforce a restrictive covenant. Under the new law, an employee can recover attorneys’ fees and costs from an employer if the employee is the prevailing party in a lawsuit or arbitration brought by an employer to enforce non-competition or non-solicitation covenants.
The new law contains a provision that prohibits employers from enforcing a non-competition or non-solicitation provision with any employee who an employer terminates or furloughs as a result of the COVID-19 pandemic or “under circumstances that are similar to the COVID-19 pandemic,” unless the employer pays the affected employee’s base salary throughout the period of enforcement, less any compensation the affected employee receives through other employment during the period of enforcement.
5. Codifying Certain Illinois Common Law Rules
The new law confirms a rule that some Illinois appellate courts had imposed requiring there to be “at least two years or more of continued employment” in order to find that there was sufficient consideration exchanged for the restrictive covenants, if continued at-will employment alone (as opposed to some other “professional or financial benefits”) was the consideration for the restrictive covenants. Previously, there had been some uncertainty as to whether the Illinois Supreme Court would adopt the “two years or more of continued at-will employment” rule, which led to inconsistent results. The amendments to the Illinois Freedom to Work Act resolves that ambiguity. The amendment also confirms that other pre-existing tests that Illinois courts had used for determining the enforceability of restrictive covenants still apply.
6. Special Treatment for Certain Sectors
The new law also prohibits non-compete agreements with employees covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act. That same prohibition also applies to individuals in the construction industry, with carve-outs for employees who perform primarily management, engineering or architectural, design, or sales functions or who are shareholders, partners, or owners of the employer.
When Will This Law Take Effect?
The law will take effect on January 1, 2022 and will only apply to restrictive covenants entered into on or after January 1, 2022. The law will not apply retroactively.
How Should Illinois Employers Prepare?
Employers who have entered into legally enforceable restrictive covenants prior to January 1, 2022 will be able to rely upon and enforce those agreements under the pre-existing legal standards. Employers should carefully review their form agreements, however, to ensure that any restrictive covenants entered into after December 31, 2021 comply the new law’s requirements.