With surprisingly little fanfare, Governor Pritzker recently signed into law amendments to the Illinois Freedom to Work Act (the “Act”), with the potential to impact all restrictive covenant agreements entered into on or after January 1, 2022. Companies with operations and employees in Illinois need to evaluate their current restrictive covenant agreements and practices to ensure compliance with the requirements set out in the new legislation, some of which are discussed herein.
The Act bans the use of covenants not to compete for employees with annualized or expected earnings of $75,000 or less, subject to $5,000 upward adjustments every five years until 2037. It also bans the use of covenants not to solicit workers whose annualized or expected earnings are $45,000 or less, subject to $2,500 upward adjustments every five years until 2037.
Significantly. a “covenant not to compete” is defined in the Act as:
an agreement between an employer and an employee … that restricts the employee from performing: (1) any work for another employer for a specific period of time; (2) any work in a specified geographical area; or (3) work for another employer that is similar to employee’s work for the employer included as a party to the agreement.
Also included in the definition of a covenant not to compete is:
an agreement between an employer and an employee … that by its terms imposes adverse financial consequences on the former employee if the employee engages in competitive activities after the termination of the employee’s employment with the employer.
Although it’s not clear, presumably this definition includes restrictive covenants used as a condition of severance pay.
The Act defines a “covenant not to solicit” as:
an agreement between an employer and employee that “(1) restricts the employee for soliciting from employment the employer’s employees or (2) restricts the employee from soliciting, for the purpose of selling products or services of any kind to, or from interfering with the employer’s relationships with, the employer’s clients, prospective clients, vendors, prospective vendors, suppliers, prospective suppliers, or other business relationships.
The new Illinois law bans the use of non-competes, regardless of income level, with individuals covered by collective bargaining agreements under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act, subject to an exception for certain construction employees (against whom non-competes may still be enforced provided they comply with other aspects of the law). The legislation also bars companies from entering into covenants not to compete and covenants not to solicit with employees who were terminated, furloughed or laid off as a result of either business decisions or governmental mandates arising out of the COVID-19 pandemic, as well as other similar types of pandemics or emergencies in the future, unless garden-leave payments are provided during the restricted period.
It should be noted that the Act does not bar or affect the use of covenants not to compete or covenants not to solicit with the owners and buyers/sellers of a business in connection with acquisitions. It also does not bar employers from enforcing confidentiality restrictions and obligations with respect to inventions and other work product. Employees will continue to be bound by statutory limitations on the acquisition, use or disclosure of trade secrets. Further, the statute expressly excludes from the definition of “covenant not to compete” contract provisions “requiring advance notice of termination of employment, during which notice period the employee remains employed by the employer and receives compensation.” This presumably includes contract provisions requiring: (a) employers to provide advance notice of a termination, and (b) employees to provide advance notice of a resignation.
Under the Act, a covenant not to compete or a covenant not to solicit that is not specifically banned under the legislation will nonetheless be considered void and unenforceable, unless “(1) the employee receives adequate consideration, (2) the covenant is ancillary to a valid employment relationship, (3) the covenant is no greater than required for the protection of a legitimate business interest of an employer, (4) the covenant does not impose undue hardship on the employee, and (5) the covenant is not injurious to the public.” Although under this standard, the courts will ultimately have to make the determination as to whether a covenant is enforceable, the new Illinois statute attempts to provide some clarity as to the length of employment that would constitute adequate consideration to support a restrictive covenant. Adopting a test created and applied by the courts over the years, the law defines “adequate consideration” as:
(1) the employee worked for the employer for at least 2 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.
This definition, like the court test on which it is based, leaves much to be desired. While consideration should be established when an employee has worked for more than two years after signing the restrictive covenant, complications can arise when employees work for less than two years after signing such an agreement, or change roles and their employers utilize new agreements.
The Act’s definition of an employer’s “legitimate business interest” also adopts a test created and applied by the courts over the years, and likewise falls short on clarity. In determining the legitimate business interest of an employer, “the totality of the facts and circumstances of the individual case should be considered” under the Act:
Factors that may be considered in this analysis include, but are not limited to, the employee’s exposure to the employer’s customer relationships or other employees, the near-permanence of customer relationships, the employee’s acquisition, use or knowledge of confidential information through the employee’s employment, the time restrictions, the place restrictions, and the scope of the activity restrictions. No factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case. Such factors are only non-conclusive aids in determining the employer’s legitimate business interest, which in turn is but one component in the 3-prong rule of reason, grounded in the totality of the circumstances…
Like most other legislation over the last few years, the Illinois law requires that companies provide employees with a copy of the non-compete or non-solicit agreement in advance of starting a new role, and that companies advise employee “in writing to consult with an attorney before entering into the covenant.”
Finally, the Act provides that if an employee prevails on a claim to enforce a covenant not to compete or covenant not to solicit, the employee “shall” recover from the employer all costs and reasonable attorney’s fees in connection with any such claim.
Given the significance of this new legislation, companies with operations or employees in Illinois should begin evaluating their current restrictive covenant agreements and practices, compensation packages and approaches in their current practice with respect to offers of employment prior to its effective date of January 1, 2022. In doing so, companies should also take advantage of the few employer-friendly aspects of the legislation, and consider other strategies that remain effective at curbing unlawful competition and protecting confidential and trade secret information. This would include the use of choice of law and exclusive venue provisions, neither of which is expressly banned by the Act.
For more information, please contact Norm Finkel at 312-648-2300 or Norm.Finkel@sfbbg.com.