Meet Jane Doe, owner and operator of Chicago-based XYZ Corporation. Though business is booming at XYZ, not everything is as it should be. That’s because John—Jane’s top-performing salesperson—just departed for a cross-town competitor.
When John left XYZ, he took with him a large client base and a mountain of contact information developed over time, potentially a crushing blow to XYZ’s business. In response, and to assure this won’t happen again, Jane decided to present her remaining salespeople with agreements restricting them from competing with XYZ after the termination of their employment. She plans on requiring them to sign within ten days . . . or else.
Not so fast, Jane (and any other businessman and woman in Illinois with plans to employ restrictive covenants). Governor J.B. Pritzker has just signed into law amendments to the Freedom to Work Act (Act) that significantly limits the use of these types of contracts in Illinois.
Restrictive Covenants, Generally
It’s not uncommon for employers to ask employees to execute agreements not to compete. By their terms, these non-compete covenants restrict former employees from engaging in competitive activities after the termination of employment. More specifically, a non-compete agreement (as defined by the Act) serves to “restrict 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.”
Of note, most courts, including those in Illinois, frown upon non-compete agreements because they impair freedom of employment. To be enforceable, the covenants not to compete are typically required to meet three strict legal standards: they must be (1) reasonable; (2) supported by consideration (read: an employer must provide something of value in exchange for an employee’s promise to refrain from competing with his or her former company); and (3) designed to protect “legitimate business interests.”
By way of the recent amendments to the Act, which impact certain restrictive covenant agreements entered into on or after January 1, 2022 (the amendment does not apply retroactively to restrictive covenants entered into before 2022), Governor Pritzker has raised the bar on enforceability.
The Amended Law
The Act now prohibits the imposition of non-compete agreements upon employees unless their “actual or expected annualized rate of earnings exceeds $75,000 per year,” which means that it will impact the majority of Illinois’ private sector workforce. The income threshold amount is subject to $5,000 upward adjustments every five years until 2037. The law doesn’t stop there. It also bans covenants not to solicit, but only for workers earning $45,000 or less per year. This sum can be adjusted upward also, though by only $2,500 every five years through 2037.
As for the latter prohibition, 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.”
Regardless of income level, most employees covered by collective bargaining agreements under the Illinois Public Labor Relations Act or Educational Labor Relations Act can’t be subject to restrictive covenants—this according to the Act. There is more. Individuals terminated, furloughed or laid off because of the COVID-19 pandemic can’t be compelled to sign non-competes either.
At the same time, the Act does allow restrictive covenants to be used against the owners, buyers and sellers of acquired businesses. In addition, and among other things, contracts can include confidentiality provisions in connection with inventions and other work product.
Acceptable Agreements Not to Compete
Despite the significant limitations on the use of restrictive covenants, these agreements are permissible if not otherwise banned (e.g. for employees earning at least $75,000 annually). However, even if allowed, non-competes will be deemed 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.”
Furthermore, the Act outlines a non-exhaustive list of factors for courts to consider when assessing whether a restrictive covenant is properly tailored to protect the employer’s legitimate business interest, including 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 employment; time and place restrictions; and the scope of the activity restrictions.
The Takeaway for Employers
As indicated above, enforceability of a wide swath of non-compete agreements will change beginning on January 1, 2022. As such, those doing business in Illinois must closely scrutinize their restrictive covenant practices going forward.
Moreover, where employers are permitted to impose non-compete or non-solicitation agreements upon employees, copies of those contracts must be delivered before the restrictive covenants become effective. In these circumstances, the employees must be advised “in writing to consult with an attorney before entering into [a restrictive] covenant” and be given 14 days to review their proposed agreements. These requirements apply to both new hires as well as current employees who enter into restrictive covenants after January 1, 2022.
Lastly, the amendment gives the Act sharper teeth by creating mandatory attorney’s fees rights for employees who prevails against their former employers that file civil actions or arbitrations to enforce non-competition or non-solicitation agreements. Without question, the amendment is likely to force employers to take pause before attempting to enforce restrictive covenants against a covered employee.
This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.