Illinois Legislature Passes Bill Impacting Non-Competition and Non-Solicitation Covenants: What Employers Need to Know (US)
Squire Patton Boggs Summer Associate Gabrielle Martin summarizes substantial changes to Illinois’ Freedom to Work Act included in recently-passed legislation which will impose significant new requirements and limitations on the use of non-competition and non-solicitation covenants in Illinois.
Joining an emerging trend among the states to place statutory limits on the ability of employers to both enter into and to enforce agreements requiring employees to refrain from post-employment competition and solicitation, on May 31, 2021, the Illinois legislature passed Senate Bill 672 which will impose substantial restrictions on when employers can enforce those agreements, also called restrictive covenants, against Illinois employees. The proposed law, which Governor Pritzker is expected to sign into law, amends the Illinois Freedom to Work Act to clarify previously unclear provisions of that law, establishes new requirements for agreements with restrictive covenants, and codifies standards and restrictions applying specifically to non-solicitation covenants.
Non-Competition and Non-Solicitation Covenants: Terms and Enforceability
Originally passed in 2017, Illinois’ Freedom to Work Act prohibited “covenants not to compete” for “low-wage employees,” defined as those earning up to $13.00 per hour or minimum wage (currently $11.00/hour in Illinois), whichever is greater. Because the statute only addressed covenants not to compete, it was unclear whether the prohibition in the statute also applied covenants not to solicit. The proposed law resolves that uncertainty by amending the Freedom to Work Act to explicitly include non-solicitation covenants; the new restrictions in Senate Bill 672 will apply to agreements that prohibit the solicitation of customers and vendors as well as the solicitation of employees. The bill additionally clarifies 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.
The bill also replaces the “low-wage” definition, which referenced hourly wages, with an annualized earnings requirement, joining states like Washington and Maine, to declare void any non-competition covenants for employees earning $75,000 per year or less (inclusive of all forms of taxable compensation). This earnings amount increases by $5,000 increments every five years, through 2037. Similarly, the bill also introduces a threshold for non-solicitation covenants, requiring that the employee earn at least $45,000 per year (inclusive of all forms of taxable compensation) to be enforceable. These amounts increase as well, in $2,500 increments, every five years through 2037.
What Illinois Employers Need to Know: Key Provisions
Senate Bill 672 includes several key provisions that Illinois employers which intend to implement and enforce restrictive covenants need to know. First, with regard to the consideration provided by an employer to render the covenant(s) enforceable, the bill codifies the two-year continued employment requirement from Fifield v. Premier Dealer Services, Inc., 993 N.E.2d 938 (Ill. App. Ct. 2013). Under the bill, the “adequate consideration” requirement may be met only if: (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.”
The bill also adopts the “legitimate business interest” requirement outlined in Reliable Fire Equipment Co. v. Arredondo, 965 N.E.2d 393 (Ill. 2011). In that case, the Illinois Supreme Court delineated a “totality of the facts and circumstances” standard to determine if a restrictive covenant meets the requirement that it protect an employer’s legitimate business interests. Here, the bill provides a similar standard: “In determining the legitimate business interest of the employer, the totality of the facts and circumstances of the individual case shall be considered.”
In addition, the bill provides that employers must advise an employee in writing to consult with an attorney before signing a non-competition or non-solicitation agreement. The employer also must provide at least 14 calendar days for an employee to review a proposed restrictive covenant agreement (but the employee can sign in less than 14 days if they choose to do so).
Conforming to Illinois common law, the bill codifies the “blue pencil” doctrine. Thus, courts will be able to use their discretion to reform or sever provisions of an overly broad and otherwise unenforceable covenant, rather than striking it as unenforceable as a whole. The bill provides the following factors for courts to consider when deciding when and how to reform covenants: “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.”
Last but by no means least, the bill allows employees who prevail in an action brought by an employer to enforce a covenant not to compete or solicit to recover their costs and attorneys’ fees from the employer. (No such provision is included for prevailing employers, meaning that employers will have to consider the added expense of potentially having to pay the employee’s fees and costs if unsuccessful in litigation when deciding whether to sue an employee.)
A Sign of the Times: COVID-19 Considerations
Senate Bill 672 takes into consideration the impact the COVID-19 pandemic has had on employee mobility issues by carving out an exception for Illinois employees who were furloughed or terminated due to circumstances related to COVID-19, declaring void non-competition and non-solicitation covenants for such employees. Importantly, however, employers may nonetheless enforce a non-competition covenant by paying the employee’s base salary from the date of termination through the period of enforcement, minus compensation earned by the employee through subsequent employment. The bill does not appear to include a comparable provision for non-solicit covenants.
If, as is expected, Senate Bill 672 is signed into law, its amendments to the Illinois Freedom to Work Act would go into effect on January 1, 2022, and apply to agreements between an employer and an employee entered on or after that date. Thus, the new provisions and restrictions therein would not be retroactive, and would not apply to agreements entered into before January 1, 2022.
Although the bill adds certainty to some previously questioned areas of both the Illinois Freedom to Work Act and Illinois common law, courts still have significant discretion when determining the enforceability of post-employment restrictive covenants. Illinois employers therefore should consult with counsel and review and revise their agreements to fit within these new legal requirements.