Alerts

7/8/2021

Illinois limits the use of non-competition and non-solicitation agreements

The Illinois General Assembly recently approved a bill that expands the Illinois Freedom to Work Act. This law had previously restricted the use of post-employment, non-competition and non-solicitation agreements with low-wage employees in Illinois. The new bill greatly expands those protections to more employees based on their annualized earnings. It is expected that Gov. Pritzker will sign this bill, which will then go into effect Jan. 1, 2022. The change is only prospective, but it will greatly effect non-competition and non-solicitation law in Illinois in the employment context.

The amended law prohibits employers from requiring employees who earn less than $75,000 per year from entering into agreements with covenants not to compete. A covenant not to compete prevents employees from working for competitors. Covenants not to compete are defined to exclude the following: agreements not to solicit, confidentiality agreements, trade secrets and invention assignments, agreements providing paid garden leave, agreements that an employee not reapply for employment with the same employer after termination, and agreements entered into in connection with the purchase or sale of a business.

The amended law also bans employers from requiring employees who earn less than $45,000 per year from entering into covenants not to solicit. This includes agreements prohibiting employees from soliciting other employees to terminate their employment, soliciting customers to stop purchasing goods or services from the employer, and from interfering with their employer’s relationships with clients, prospective clients, vendors, suppliers and other business relationships.

The compensation thresholds will increase every five years. The non-competition threshold will increase by $5,000 to $80,000 on Jan. 1, 2027; to $85,000 on Jan. 1, 2032; and to $90,000 on Jan. 1, 2037. The non-solicitation threshold will increase by $2,500 to $47,500 on Jan. 1, 2027; to $50,000 on Jan. 1, 2032; and to $52,500 on Jan. 1, 2037. Annualized earnings are defined to include an employee’s salary, earned bonuses, earned commissions or any other form of taxable compensation, plus elective deferrals such as employee contributions to their 401(k) plan, a 403(b) plan, a flexible spending account or commuter benefit-related deductions.

The amendment excludes employees governed by collective bargaining agreements and those working in construction, unless the employees primarily perform management, engineering or architectural design or sales functions for their employers or are shareholders, partners or owners in any capacity of a given business.

Employers also will be prohibited from enforcing restrictive covenants with employees who have been separated from their employment due to the COVID-19 pandemic or similar circumstances, unless the employee receives compensation equal to their base minus compensation earned through subsequent employment during the enforcement period.

Representing a significant change in some on-boarding practices, employers will not be able to simply provide their new employees with a non-competition or non-solicitation agreement in their new hire packet and expect their signatures with their I-9 and W-4 forms. Under the new law, employers will be required to give their employees up to 14 calendar days to review the agreement and employers will be required to advise their employees, in writing, to consult with an attorney before signing the agreement.

To provide guidance, the law had codified rules set forth in two Illinois court decisions. First, it materially codifies the rule set forth in Fifeld v. Premier Dealer Services (2013 IL App (1st) 120327), which defined the adequacy of consideration for restrictive covenant agreements to either: (1) two years of continuous employment after signing an agreement; or (2) other consideration, such as a “period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.” Next, it codifies the rule in Reliable Fire Equipment Co. v. Arredondo (965 N.E.2d. 393 (Ill. 2011)), that courts should utilize a “totality of circumstances” test when determining an employer’s “legitimate business interest” in requiring post-employment restrictions.

The law expressly permits courts to “blue-pencil,” or reform, non-competition and non-solicitation agreements rather than find them unenforceable. It also awards prevailing employees their costs and attorneys’ fees in addition to providing for oversight by the Illinois Attorney General.

Although the law is prospective only and does not take effect until Jan. 1, 2022, employers are encouraged to review their current agreements and evaluate their use before year end. Please do not hesitate to contact one of Chuhak & Tecson, P.C.’s Employment Practice attorneys if you have any questions or concerns.

Client Alert authored by Jeralyn H. Baran (312 855 4613), Principal and leader of Chuhak & Tecson’s Employment Practice.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.