Non-Compete Law in Illinois
On May 31, 2021, the Illinois legislature passed a new bill which, if Governor Pritzker signs the bill as he is expected to do, will amend the Illinois Freedom to Work Act (“IFWA”) and impact a much larger portion of the Illinois labor market.
For a refresher, Illinois enacted the IFWA in 2016, and the Act prohibits employers from entering into covenants not to compete with “low wage” employees. Low wage employees are defined as employees whose earnings do not exceed the greater of (a) the minimum hourly wage or (b) $13.00 per hour. When Governor Pritzker signs the bill, it will expand the scope of the IFWA in several ways because it removes the “low wage” definition, increases the wage threshold, requires Employer giving advanced notice, and adds an attorney fee shifting provision, among others.
Amendments to the Illinois Freedom to Work Act
Below is a list of some of the important and relevant changes which may go into effect on January 1, 2022:
- Adequate Consideration. The bill states, “Adequate consideration” means (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.
- Legitimate Business Interest. The legitimate business interest of an employer will be based on the totality of the circumstances approach. Specifically, a non-exhaustive list of factors to consider are the following: 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.
- Low Wage Employee. The definition of low wage employee was removed. Instead, covenants not to compete are valid only with employees who earn $75,000 or more per year. Similarly, non-solicitation agreements are valid only with any employees who earn $45,000 or more per year.
- Covid-19 Pandemic. An employer shall not enter into a covenant not to compete or covenant not to solicit with any employee if such employee was terminated, furloughed, or laid off as a result of business circumstances or governmental orders related to the Covid-19 pandemic. An exception exists to the above if the employer compensates the employee equal to the employee’s base salary at the time of termination for the period of enforcement minus compensation earned through subsequent employment.
- Collective Bargaining. Covenants not to compete are illegal and void with individuals who are covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act and individuals in construction. However, this does not apply to construction employees who perform management, engineering or architectural, design, or sales functions for the employer or who are shareholders, partners, or owners in any capacity of the employer.
- A covenant not to compete or a covenant not to solicit is illegal and void unless (1) the employee receives adequate consideration (defined above), (2) the covenant is ancillary to a valid employment relationship, (3) the covenant is no greater than is required for the protection of a legitimate business interest of the employer, (4) the covenant does not impose undue hardship on the employee, and (5) the covenant is not injurious to the public.
- An employer must advise the employee in writing to consult with an attorney before entering into the agreement and must provide the employee with the agreement at least 14 calendar days before employment commences or 14 calendar days to review the agreement.
- Attorney General. The attorney general may initiate an action if it has reasonable cause to believe an individual or entity is violating this Act. Penalties associated with violating this Act include up to $5,000 for each violation or $10,000 for repeat violations within a 5-year period.
- Attorney Fees. The bill allows employees to recover from employers all costs and all reasonable attorney’s fees in civil actions filed by employers to enforce the restrictive covenants if the employees prevail in such an action.
- The new bill allows a court, in its discretion, to reform or sever provisions of such agreements.
As shown above, the Illinois Legislature touched on many points of confusion and tension with the current bill. Specifically, clarifying the definition of adequate consideration, albeit only to some degree, should assist employers and employees alike in determining what is sufficient when entering into these agreements. However, the amendments may be seen as problematic to some as the bill sets forth additional requirements and prohibitions for employers to be weary of. As such, given the effective date of this bill is January 1, 2022, Employers should act now by reviewing current restrictive covenants and should also consider entering into new covenants not to compete prior to the effective date.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.