Illinois Renews Effort to Enact Expansive Restrictive Covenant Legislation
In 2016, Illinois enacted the Illinois Freedom to Work Act (IFWA). In doing so, it became one of the first states to pass legislation in response to the Obama administration’s Call to Action, which asked states to amend their restrictive covenant laws to, among other things, ban covenants not to compete for workers under a certain wage threshold. Other states that similarly enacted or amended their restrictive covenant laws to include low-wage restrictions, include Maine, Maryland, Massachusetts, New Hampshire, Rhode Island, Virginia, and Washington. In January 2021, the District of Columbia took the trend a step further by enacting the Ban on Non-Compete Agreements Amendment Act of 2020, which bans virtually all noncompetes for employees in the District.
On January 8, 2021, Illinois jumped back into the fray with its introduction of House Bill (HB) 789. Unlike prior (unsuccessful) legislative efforts to ban the use of covenants not to compete in Illinois, HB 789 seeks to amend the IFWA by increasing the law’s income thresholds, expanding the scope of covenants, and imposing new requirements for these covenants to be enforceable. Here are the current key aspects of HB 789 that are being considered.
The IFWA defines a “covenant not to compete” as an agreement between “an employer and a low-wage employee that restricts the low-wage employee from performing” certain types of work. HB 789 would remove the term “low-wage” and expand the definition to include covenants that “impose adverse financial consequences” on former employees who engage in prohibited competitive activities. Excluded from the definition of covenants not to compete under HB 789 are:
covenants not to solicit (employee and customer)—but note that there is separate coverage under the bill for covenants not to solicit;
confidentiality agreements or covenants;
covenants prohibiting the use or disclosure of trade secrets;
covenants entered into in connection with the purchase or sale of a business;
covenants requiring employees to provide advance notice of termination of employment; and
covenants prohibiting employees from reapplying after being discharged.
HB 789 contains similar requirements for a covenant not to solicit, which the bill defines as “an agreement that … restricts an employee from soliciting … the employer’s employees or … the employer’s clients, prospective clients, vendors, prospective vendors, suppliers, prospective suppliers, or other business relationships.”
The IFWA prohibits employers from entering into covenants not to compete with “low-wage” employees—i.e., those employees earning the greater of the applicable minimum wage or $13.00 per hour. HB 789 would remove all references to “low-wage” in the IFWA. It also would significantly increase the income threshold that must be met for the covenants to be enforceable. For example, covenants not to compete would not be valid and enforceable unless the employee’s “actual or expected” annual earnings exceeded $75,000 per year. That amount would increase to $80,000 in 2027, $85,000 in 2032, and $90,000 in 2037.
For covenants not to solicit, the employee’s “actual or expected” annual earnings would have to exceed $45,000. This threshold would increase to $47,500 in 2027, $50,000 in 2032, and $52,500 in 2037.
Garden Leave for Certain Terminations
HB 789 would also render a covenant not to compete “void and illegal” for any employee whose job was terminated or who was furloughed due to circumstances “related to the COVID-19 pandemic, or under circumstances that are similar to the COVID-19 pandemic,” unless the employer paid the employee the equivalent of his or her base salary for the duration of the covenant not to compete period “minus compensation earned through subsequent employment during the period of enforcement.” The current version of the bill, however, does not contain a definition of “furlough” or any explanation of what constitutes “circumstances that are similar to the COVID-19 pandemic.”
The bill would require an employer to “(i) advise the employee in writing to consult with an attorney before entering into the covenant and (ii) … provide the employee with a copy of the covenant at least 14 calendar days” prior to the start of employment or “provide the employee with at least 14 calendar days to review the covenant.” Failure to comply with these provisions would render a covenant not to compete or not to solicit “illegal and void.”
Other Requirements Codifying Illinois Common Law
Codifying Illinois common law, including the 2011 Illinois Supreme Court decision in Reliable Fire Equipment Co. v. Arredondo, 965 N.E.2d 393 (Ill. 2011), HB 789 would provide that “[a] covenant not to compete or a covenant not to solicit is illegal and void unless (i) the employee receives adequate consideration, (ii) the covenant is ancillary to a valid employment relationship, (iii) the covenant is no greater than is required for the protection of a legitimate business interest of the employer, (iv) the covenant does not impose undue hardship on the employee, and (v) the covenant is not injurious to the public.” With respect to consideration, the bill appears to codify the decision of the Illinois First District Appellate Court in Fifield v. Premier Dealer Services, Inc., 993 N.E.2d 938 (Ill. App. Ct. 2013), which held that an employee must work for an employer for at least two years after signing a restrictive covenant or the employer must otherwise provide adequate other consideration (undefined, but likely monetary) to support the covenant.
Finally, the bill sets forth the factors courts would have to consider when evaluating whether to reform or render restrictive covenants void and unenforceable, which largely codify existing Illinois common law, including under Eichmann v. National Hospital and Health Care Services, Inc., 719 N.E.2d 1141 (Ill. App. Ct. 1999), and Pactiv Corp. v. Menasha Corp., 261 F. Supp. 2d 1009 (N.D. Ill. 2003).
Departing from common law, HB 789 would provide that an employee could recover “all costs and all reasonable attorney’s fees” if he or she prevailed in a civil action filed by an employer—regardless of whether the covenant or corresponding agreement included a fee-shifting provision.
While HB 789 is in its early stages and Illinois has historically failed to enact comprehensive restrictive covenant legislation, employers may want to be generally mindful of this most recent effort, including its heightened likelihood of passage in some form because it takes a more measured approach to restrictive covenants. If employers are concerned about the future of their restrictive covenant programs under this bill or similar legislation, they may want to consider reviewing their confidentiality or nondisclosure covenants to ensure that confidential information, trade secrets, goodwill, and other interests are adequately protected.
The Feds—More to Come?
At the federal level, President Joe Biden has repeatedly taken aim at covenants not to compete, stating in 2019 that “We should get rid of non-compete clauses and no-poaching agreements that do nothing but suppress wages,” and pledging to “[e]liminate noncompete clauses and no-poaching agreements” as a presidential candidate.
Prior efforts to ban covenants not to compete nationally have failed, and the Biden administration has yet to provide insight into what proposed legislation might look like. Whether such a ban would be effective or enforceable—and to what employee populations—are other questions. Covenants not to compete are contracts, the regulation of which is typically left to the states. While a federal law banning covenants not to compete might pass muster under the United States Constitution’s commerce clause, it would not come to pass without a fight both on the front end (including through lobbying efforts) and the back end (through constitutional challenges).
In the meantime, employers may want to ensure their agreements comply with existing law and proactively consider changes that may result from the passage of HB 789.