Restrictive covenants are intended to protect an employer’s legitimate business interests following an employee’s departure from the business. While these agreements are quite common, Illinois law in this area has evolved over the past decade to rein in the use or scope of these agreements. Indeed, the seminal Fifield v. Premier Dealer Services, Inc. decision by the Illinois Court of Appeals in 2013 — which held that less than two years of employment is not sufficient consideration to support a noncompete agreement — resulted in a slew of cases in the state and federal courts regarding whether two years of continuous employment was a bright-line rule. 993 N.E.2d 938, 2013 IL App (1st) 120327, appeal denied 996 N.E. 2d 12 (Ill. 2013). Then, in 2016, Illinois passed the Illinois Freedom to Work Act, 820 ILCS 90/1, that banned the use of noncompete agreements with low-wage workers (i.e., employees who earn an hourly rate equal to the required minimum wage under federal, state or local law, or $13.00 per hour, whichever is greater). The use and scope of nonsolicitation agreements has also been subject to increased scrutiny, with courts looking closely at what level of contact, if any, the employee had with customers covered by the nonsolicitation agreement and taking up novel issues like whether updating a LinkedIn profile with new employer information is considered a “solicitation.”
Recently, the Illinois legislature passed a bill to amend the Illinois Freedom to Work Act to expand the ban on noncompetes to a larger population of workers and provide certain rights to employees who are asked to sign noncompete and nonsolicitation agreements as a condition of employment. Because Gov. J.B. Pritzker is expected to sign that bill, employers should begin evaluating how those amendments will impact their use of noncompete and nonsolicitation agreements and what changes will be necessary to comply with the new law. Of note, because the bill is not retroactive, these changes will not impact existing agreements. Read on to ensure your organization is braced for the shifting headwinds.
Overview of Changes Coming January 1, 2022
- Salary-Dependent Ban: Employers in Illinois may not enter into a noncompete agreement with any employee earning $75,000 or less annually. A similar restriction applies to nonsolicitation agreements for any employee earning $45,000 or less annually. These amounts are due to increase in 2027, and every five years thereafter. The nonsolicitation prohibition covers both solicitation of customers or clients and other employees. The latter means no more anti-raiding clauses for this subset of employees.
- Required Disclosures: Noncompete and nonsolicitation agreements must notify the employee that they have the right to consult with an attorney and must provide the employee with at least 14 days to consider whether to sign the agreement. These disclosures and minimum-time period are similar to what we would typically put in a separation agreement. While an employee can sign such an agreement before 14 days has passed, employers must now build in time for an employee to review these agreements before any onboarding begins.
- Blue Pencil Clause: Illinois courts have generally been willing to apply a “blue pencil” to reform a covenant if they find it too broad as written, but only after considering certain factors, including whether the parties agreed to such reformation in the agreement. Because the amendments follow that line of cases, it is critical that a noncompete and nonsolicitation agreement have a clause that defers such a right to the court in the event of a challenge to enforceability.
- Totality of Circumstances Reigns: A fundamental principle of noncompetition agreements is that the restriction placed on the employee must be no greater than what is required to protect the employer’s legitimate business interest. To determine if the employer has a legitimate business interest, the court will look at the totality of the facts and circumstances of the individual case. The amendments track the existing case law in this area, listing numerous factors that may be considered when determining whether the employer has a legitimate business interest. Those factors include “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.” Importantly, the amendments make it clear that there is no one-size-fits-all approach to these covenants because “[t]he same identical contract and restraint may be reasonable and valid under one set of circumstances and unreasonable and invalid under another set of circumstances.” Consequently, an employer should engage in an individualized assessment to see whether the restriction placed on the employee is truly necessary to protect its legitimate business interests, and be prepared to defend that position if the employee departs to work for a competitor.
- No Bright-Line Rule for Continuous Employment: For a covenant to be enforceable, it must be supported by adequate consideration. Consistent with existing case law, the amendments recognize that two years of continuous employment is adequate consideration, but something less could also be adequate consideration for the covenant. Indeed, adequate consideration could be “a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.” Here, the amendments once again track the existing case law, at least in the federal courts, where a combination of substantial employment (although less than two years) and a bonus or some other financial benefit has been deemed adequate to support a noncompetition agreement.
- Beware of Fee-Shifting: If an employee prevails on a claim to enforce a noncompete or nonsolicitation agreement, the amendments provide that the employee will be entitled to recover his or her attorneys’ fees, in addition to any other damages or remedies. This type of fee-shifting provision is typical in civil rights law like Title VII but something new to restrictive covenant litigation in Illinois where the agreement does not address attorneys’ fees for the prevailing party.
- Exemptions Abound: Confidentiality and invention assignment clauses are excluded from the amendments, as are garden leave clauses and covenants executed in a sale of business context. Also, covenants not to compete are void and illegal for individuals covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act, though this does not apply to management professional personnel engaged in the construction industry.
- COVID-19 Terminations: Covenants not to complete are void and illegal for employees terminated, furloughed or laid off due to the employer’s business circumstances or government orders related to the COVID-19 pandemic, unless enforcement of the covenants includes compensation equivalent to the employee’s base salary at the time of termination for the period of enforcement minus compensation earned through subsequent employment during the period of enforcement.
- Enforcement: The attorney general may initiate an action if it has reasonable cause to believe any person or entity is engaged in a pattern or practice that is prohibited by this Act, and may obtain as a remedy monetary damages, equitable relief and civil penalties not to exceed $5,000 for each violation or $10,000 for each repeat violation within a five-year period.
Faegre Drinker’s labor and employment practice is dedicated to bringing you the latest in legal and regulatory updates impacting your workforce. If you have questions about Illinois’ new bill or need compliance support, please contact a member of our employee mobility and restrictive covenants team or the broader labor and employment group.