Changes Coming to Illinois Non-Compete and Non-Solicit Law

Authored by Katherine M. Flett with assistance from Haley E. Gassel, contributor

On August 13, 2021, Governor JB Pritzker signed SB 672 into law, amending the Illinois Freedom to Work Act, the state’s restrictive covenant statute. Going into effect on January 1, 2022, the new bill will only apply to restrictive covenants entered into on or after January 1, 2022.

Compensation Thresholds

In SB 672, the Illinois legislature reserved non-compete and non-solicit agreements for higher paid employees. The law prohibits employers from imposing non-compete agreements on employees earning less than $75,000 annually or non-solicitation agreements on employees earning less than $45,000 annually. Earnings are defined broadly to include compensation, salary, bonus, commission, or any other form of taxable compensation on the employee’s W-2 plus any elective deferrals. These salary thresholds will increase over time, beginning in 2027.

Other Prohibitions

SB 672 includes a special provision for employees furloughed or laid off “as the result of business circumstances or governmental orders related to the COVID-19 pandemic” or under similar circumstances. A non-competition or non-solicitation agreement may not be entered into under these circumstances unless enforcement of the agreement provides for “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.”

Non-competition and non-solicitation agreements are illegal for non-managerial or non-administrative employees in construction or employees covered by collective bargaining agreements under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act.

Employees’ Rights

If an employee is not advised by the employer in writing to consult with an attorney before entering into a non-competition and non-solicitation agreement, the agreement is invalid. Likewise, if an employee does not receive a copy of a non-competition and non-solicitation agreement before starting employment or with at least 14 days to review the covenant, the agreement is invalid. The employee may sign the agreement before the 14-day period has ended.

An employee that successfully defends against an employer’s enforcement of a non-competition or non-solicitation agreement not to solicit shall recover from the employer all costs and reasonable attorney’s fees, along with any other appropriate relief.

Requirements for a Restrictive Covenant to be Valid

Amendments to the Illinois Freedom to Work Act state that a non-competition or non-solicitation agreement is illegal and void unless:

1. the employee receives adequate consideration,
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.

The new law provides that a restrictive covenant is supported by “adequate consideration” if:

• the employee worked for the employer for at least two years after signing a non-competition or non-solicitation agreement; or
• the employer provides other consideration adequate to support the non-competition or non-solicitation agreement, such as a period of employment plus additional professional or financial benefits or other adequate professional or financial benefits.

Because the statute does not define professional or financial benefits, it is unclear as to what constitutes adequate consideration outside of two years of employment.

Under the new law, an employer may have a legitimate business interest that justifies a non-compete or non-solicitation agreement. Such factors which may be considered include, but are not limited to:

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.

No factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case.

Enforcement of the Act by the Illinois Attorney General

The Illinois Attorney General may initiate or intervene in a civil action whenever they have reasonable cause to believe that any person or entity is engaged in a pattern and practice prohibited by the act. The Attorney General has investigatory powers and can compel compliance with their investigative demands through court orders.

The Attorney General may request, and the court may order, a civil penalty up to $5,000 for each violation and $10,000 for each repeat violation within a five-year period. Additionally, the Attorney General may seek monetary damages, restitution, and equitable relief.

Courts Authorized to Reform Restrictive Covenants

A court may choose to reform or sever provisions of a non-compete – or non-solicitation covenant rather than holding the entire covenant unenforceable. Factors the court may consider in deciding whether reformation is appropriate include: “the fairness of the restraints as originally written, whether the original restriction reflects a good-faith effort to protect a legitimate business interest of the employer, the extent of such reformation, and whether the parties included a clause authorizing such modifications in their agreement.” The law warns, however, that judicial reformation of these covenants may be against Illinois public policy.

Conclusion

Employers in Illinois should review their restrictive covenant agreements with an attorney in light of these new changes to Illinois law. It is quite possible that a non-compete agreement which has previously been in use by an employer will not pass mustard with regard to employees hired or promoted after January 1, 2022. Not only will courts enjoin restrictive covenants that do not comply with the new statute, but use of a non-compliant agreement can subject employers to civil penalties and damages, including the employee’s attorneys’ fees incurred in challenging the agreement.

Posted by Attorney Katherine M. Flett and Haley E. Gassel. Flett is a member of the litigation team whose primary focus is on assisting clients in insurance defense, business litigation, employment law, and bankruptcy matters. Gassel contributed to this post when she was a law clerk with Danna McKitrick.

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