New Illinois Limitations on Noncompetes Go Into Effect January 1 – Update Your Restrictive Covenants Now
On May 31, the Illinois legislature passed a sweeping bill that overhauls the state’s noncompete and nonsolicitation laws. The bill was passed unanimously by the Illinois Senate and House of Representatives. If signed into law, as expected, the bill will apply to noncompete and nonsolicitation agreements entered into after January 1, 2022. While the bill partially codifies long-standing judicial precedents on the enforceability of restrictive covenants, it appears to be reasonably balanced and adds a modicum of predictability for employers wishing to restrict certain post-employment activity.
Under the new bill, a noncompete or nonsolicitation agreement is 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 legitimate business interest of the employer, which is to be determined on a case-by-case basis, based on the totality of the facts and circumstances; (4) the covenant does not impose an undue hardship on the employee; and (5) the covenant is not injurious to the public.
The bill’s definition of “adequate consideration” is a partial codification of the Illinois Supreme Court’s holding in Fifield v. Premier Dealer Services, Inc.,but clarifies what constitutes consideration if the employee does not meet the two-year employment prong discussed in that case. Specifically, adequate consideration exists when: (1) the employee worked for the employer for at least two years after signing the noncompete or nonsolicitation agreement (consistent with the holding in Fifield) or (2) the employer otherwise provided consideration, which can consist of a period of employment plus additional professional or financial benefits or merely professional or financial benefits. As such, valuable training, advancement, promotions, or other compensation and benefits may now support a finding of consideration, even if the employee has worked less than two years from the date of the applicable restrictive covenant.
Importantly, covenants not to compete or solicit are invalid under the bill if the employee entering into the covenant is not adequately compensated. The minimum annual income threshold for valid noncompete agreements is $75,000 and $45,000 for nonsolicitation agreements. The thresholds will increase every five years to account for inflation, beginning in 2027.
Employers must also now satisfy administrative requirements in order to enforce noncompete and nonsolicitation agreements, including (1) advising the employee in writing to consult with an attorney before entering into the agreement and (2) providing the employee a copy of the agreement and at least 14 days to review the agreement before signing. While there is no prohibition on making the signing of a restrictive covenant a condition of employment or continued employment (assuming the minimum income thresholds and other requirements are met), employees must be given sufficient time to review and consider the agreement before entering into it.
Further, noncompete and nonsolicitation agreements with certain employees and under certain circumstances are prohibited. For example, an employer cannot enter into a noncompete or nonsolicitation agreement with any employee terminated as a result of the COVID-19 pandemic unless the employer continues to pay the employee their base compensation rate at the time of termination for the duration of the restricted period, less any compensation earned at a subsequent job. Noncompete agreements are also forbidden with public employees or individuals employed in construction, subject to some exceptions.
The bill allows employees to collect reasonable attorney’s fees if the employee prevails on a claim to enforce a noncompete or nonsolicitation agreement. It also authorizes the Illinois attorney general to enforce the law directly by initiating an investigation or litigation, or intervening in a civil action if it has reasonable cause to believe that an employer is engaging in a pattern and practice prohibited by the law.
Importantly, certain restrictive covenants other than noncompetes and nonsolicits are specifically exempted from the bill’s requirements, including confidentiality agreements, agreements prohibiting use or disclosure of trade secrets or inventions, and invention assignment agreements, among others.
Finally, the bill expressly codifies “blue-penciling,” which allows courts to rewrite unenforceable provisions of noncompete agreements to make them reasonable and enforceable. But, when blue-penciling, courts must consider, among other things, 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 the reformation, and whether the parties included a clause authorizing such modification.
This legislation in Illinois is the most recent in a series of recent state laws aimed at imposing limitations on and definition to some restrictive covenants and, given the broad bipartisan support it received, may serve as a model for other states looking at similar measures. We will continue to monitor Illinois’ and other noncompete and nonsolicitation legislation around the country.