Illinois Legislature Enacts New Requirements on Non-Competition Covenants in Employment Agreements
The Illinois General Assembly recently amended the Illinois Freedom to Work Act by significantly restricting the enforceability of covenants not to compete and covenants not to solicit in Illinois employment agreements.
Covenants not to compete are provisions in employment agreements through which an employee promises that, while the employee is employed by the employer and for a certain period of time after the employee’s employment terminates, the employee will not engage in activity that competes with the employer, such as working for or obtaining an ownership interest in a company that competes with the employer.
Covenants not to solicit are provisions in employment agreements through which an employee promises that, while the employee is employed by the employer and for a certain period of time after the employee’s employment terminates, the employee will not attempt to solicit the employer’s customers, clients, or employees.
In 2016, the Illinois legislature passed the Freedom to Work Act (the “Act”), which banned covenants not to compete for low-wage employees. Low-wage employees were defined as employees making the greater of the applicable federal, state, or local minimum wage or thirteen dollars per hour. On May 31, 2021, both houses of the Illinois General Assembly passed SB 672, which amends and significantly expands the scope of the Act. On August 13, 2021, Governor Pritzker signed the bill, which takes effect on January 1, 2022.
Under the amended Act, employers will be prohibited from entering into covenants not to compete with employees who earn seventy-five thousand dollars per year or less. Employers will also be prohibited from entering into covenants not to solicit with employees who earn forty-five thousand dollars per year or less. Covenants not to compete or not to solicit entered into with any employee who does not meet those salary thresholds after the effective date of the amendments will be void and unenforceable.
The amendments also codify certain requirements for covenants not to compete and not to solicit that Illinois courts have developed. As amended, the Act provides that, in order for a non-competition or non-solicitation covenant in an employment agreement to be enforceable: (1) the employee must receive adequate consideration, (2) the covenant must be ancillary to a valid employment relationship, (3) the covenant must be no greater than is required for the protection of a legitimate business interest of the employer, (4) the covenant must not impose undue hardship on the employee, and (5) the covenant cannot be injurious to the public.
Consistent with Illinois case law, the amended Act provides that the legitimacy of the employer’s business interest is to be determined by an examination of the totality of the facts and circumstances of the individual case. Several non-conclusive factors developed by Illinois courts are listed that may be used as aids in determining whether the employer has a legitimate business interest entitled to protection through a non-competition covenant. However, the bill provides that each situation must be determined on its own particular facts. Thus, the enforceability of non-competition and non-solicitation covenants will remain a very fact-intensive inquiry and will hinge on such factors as the employee’s exposure to the employer’s customers, the near-permanence of customer relationships, the employee’s acquisition, use, or knowledge of confidential information through the employee’s employment, and the scope of the geographic, temporal, and activity restrictions.
With regard to the adequacy of the consideration, the amendments codify the Illinois Appellate Court’s decision in Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327, 993 N.E.2d 938, which provides that, where the consideration for the covenant not to compete or solicit is employment, there must be at least two years of continued employment for the consideration to be considered sufficiently adequate.
A new development in the law of restrictive employment covenants introduced by the amended Act is a provision designed to ensure that employees are informed about their obligations under the covenant. The amended Act provides that a covenant not to compete or a covenant not to solicit is illegal and void unless (1) the employer advises the employee in writing to consult with an attorney before entering into the covenant and (2) the employer provides the employee with a copy of the covenant at least fourteen calendar days before the commencement of the employee’s employment or the employer provides the employee with at least fourteen calendar days to review the covenant. However, if the employee voluntarily elects to sign the covenant before the expiration of the fourteen day period, the employer will still be in compliance.
Another new development introduced by the amendments is a provision that, in any civil action or arbitration filed by an employer to enforce a covenant not to compete or not to solicit, if the employee prevails, the employee will be entitled to recover all reasonable attorneys’ fees and costs regarding the claim.
In light of these recent amendments to the Illinois Freedom to Work Act, Illinois employers should review their policies regarding covenants not to compete and not to solicit. Employers should ensure that their non-competition and non-solicitation covenants meet the additional requirements that will now be imposed. Employers should also be sure that their hiring procedures comply with the new notice requirements. Employers considering filing actions to enforce non-competition and non-solicitation covenants must also consider the new fee-shifting provision of the Act.