Illinois Imposes New Restrictions on Non-Competes and Non-Solicits
Illinois recently passed legislation amending the Freedom to Work Act (the “Act”), following a growing trend of states imposing greater restrictions on employers’ use and enforcement of non-competition and non-solicitation covenants.
On January 1, 2022, SB 672 took effect, clarifying ambiguities in the original Act and levying additional requirements on Illinois employers who seek to impose and enforce restrictive covenants. The bill’s new provisions and restrictions apply only to employer-employee agreements entered on or after January 1, 2022; the bill is not retroactive.
The original Act, effective January 1, 2017, generally prohibited employers from requiring “low-wage employees” to enter into “covenants not to compete.” The Act defined “low-wage employee” as any employee earning less than (1) the applicable federal, state or local hourly minimum wage, or (2) $13.00 per hour, whichever was greater.
SB 672 clarifies and modifies this key provision. As written, the original Act did not specify whether its restrictions extended to non-solicitation agreements. SB 672 clarifies that the Act explicitly includes non-solicitation covenants. Thus, SB 672’s restrictions apply with equal force to agreements prohibiting the solicitation of customers, vendors and employees. Conversely, SB 672 explains that “covenants not to compete” do not include confidentiality or non-disclosure agreements, trade secret protection agreements, or agreements entered into in connection with purchase and sale transactions, among others.
Also, SB 672 replaced the term “low-wage employees” and expanded the prohibition to employees who earn or are expected to earn $75,000 or less annually. SB 672 imposes similar salary thresholds on non-solicitation agreements. Employees who earn or expect to earn $45,000 or less annually are exempt from employer requirements to enter into such agreements.
SB 672 also codifies existing law regarding two key requirements underpinning enforceable restrictive covenants. First, SB 672 ratifies “adequate consideration,” as articulated in Fifield v. Premier Dealer Services, Inc., 993 N.E.2d 938 (Ill. App. Ct. 2013). Specifically, the bill provides “adequate consideration” is satisfied where: (1) the employee works for at least two years after signing the agreement; or (2) the employer provides other adequate consideration, such as “a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.”
Second, SB 672 incorporates the Illinois Supreme Court’s particularized inquiry of “legitimate business interest,” as set forth in Reliable Fire Equipment Co. v. Arredondo, 965 N.E.2d 393 (Ill. 2011). Similar to Reliable Fire, the bill considers a “totality of the facts and circumstances of the individual case.” Section 7 of the amendment provides a non-exhaustive list of factors courts may use to determine whether a restrictive covenant is properly tailored to protect an employer’s legitimate business interest. This list includes:
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.
Indeed, the bill recognizes this inherently nuanced inquiry, explaining that “[e]ach situation must be determined on its own particular facts . . . the same identical contract and restraint may be reasonable and valid under one set of circumstances and unreasonable and invalid under another set of circumstances.”
The Act also empowers courts to use their discretion to alter or sever overly broad and otherwise unenforceable restrictive covenants (i.e., “blue-penciling”), rather than striking the covenants altogether.
The bill also requires employers to advise employees in writing to consult with an attorney before entering into a non-competition or non-solicitation covenant. Employers must provide employees with 14 days to review the proposed restriction (although the employee may voluntarily sign the covenant before the expiration of the 14-day review period).
There are also special provisions in the Act to protect employees furloughed or laid off due to the COVID-19 pandemic. Specifically, employers cannot enforce non-competition or non-solicitation agreements against such furloughed or laid off employees unless the agreement provides 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 this period.
Lastly, the bill’s fee-shifting provision is potentially costly for non-compliance with the Act. Now, employees may recover all of their attorneys’ fees and costs from employers in unsuccessful enforcement actions. Notably, the bill does not provide employers with a counterpart provision. Thus, even in a successful enforcement action, employers must pay their own attorneys’ fees and costs. Moreover, the bill vests the Illinois Attorney General with the authority and power to investigate and sue employers who violate the Act.
These newest clarifications and amendments to the Illinois Freedom to Work Act reinforce the care employers must exercise in drafting narrowly tailored non-competes and non-solicits necessary to protect the employers’ legitimate business interests.