Sweeping Changes Made to Illinois Restrictive Covenants Law
On Aug. 13, 2021, Governor J.B. Pritzker signed into law the Illinois General Assembly’s sweeping changes to Illinois law regarding employee non-compete and non-solicitation agreements (Restrictive Covenants). This legislation (the Act) comes on the heels of several states that, in recent years, have enacted statutory reforms governing how Restrictive Covenants may be used by employers. The Act, which amends the Illinois Freedom to Work Act, provides several important changes to the current legal landscape in Illinois regarding Restrictive Covenants.
The Act applies to all Restrictive Covenants entered into on or after Jan. 1, 2022. However, that does not mean that the Act has no effect on contracts entered into prior to this date. Because the Act modifies the current public policy of Illinois regarding Restrictive Covenants, it remains to be seen how courts will take into account some or all of its substantive provisions as they independently weigh considerations of reasonableness, adequate consideration, and contract reformation.
The following summarizes some of the key changes under the Act and explains what they mean for employers – this list is not comprehensive, as there are many provisions contained in the Act:
Types of Restrictive Covenants Governed by the Act – The Act’s first important section relates to how it defines the types of Restrictive Covenants that fall within the Act. The Act governs agreements between employers and employees and specifies that it does not cover: confidentiality agreements; invention assignment agreements or covenants; covenants ancillary to sales of business or “otherwise acquiring or disposing of an ownership interest”; clauses between an employer and employee requiring advance notice of termination of employment, during which the employee remains employed by the employer and receives compensation (so-called “garden leave”); or agreements by which the employee agrees not to reapply for employment with the same employer after termination of the employee.
Specific Contexts and Sectors – The Act states that covenants not to compete are void with respect to individuals covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act. It also bars such agreements for individuals employed in construction, except for employees who primarily perform management, engineering, architectural, design, or sales functions or who are owners and shareholders of construction businesses.
Adequate Consideration and Reasonableness – In Illinois, the concept of adequate consideration for Restrictive Covenants has tracked the “Fifield Doctrine,” which was named after an Illinois appellate court decision that required at least two years of continued employment or some other type of actual value given — not just the job — in exchange for an employee agreeing to a Restrictive Covenant. The Act now codifies the Fifield Doctrine. This is important because several federal courts analyzing Restrictive Covenants have disagreed with the Fifield Doctrine’s application but now will be required to follow the Act in analyzing covenants governed by Illinois law.
The Act also codifies the current Illinois standard for reasonableness of a Restrictive Covenant, as illustrated in case law from the Illinois Supreme Court. A Restrictive Covenant is only reasonable if it is no greater than is required for the protection of a legitimate business interest of the employer. The Act requires a totality of circumstances and facts to be considered when making this determination. Factors to be considered in this analysis 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; and the time restrictions, the place restrictions, and the scope of the activity restrictions. Each situation must be determined on its own particular facts, and the same contract and restraint may be reasonable and valid under one set of circumstances and unreasonable and invalid under another set of circumstances.
Salary Floors for Legally Valid Covenants – The Act now provides salary thresholds for Restrictive Covenants. Employers cannot enforce non-compete agreements with employees earning less than $75,000 annualized. They also cannot enforce non-solicitation agreements with employees earning less than $45,000 per year. Both floors will increase by $5,000 in 2027, 2032, and 2037.
COVID-19-Related Restrictions – The Act also prohibits employers from enforcing Restrictive Covenants with employees whom the employer terminates, furloughs, or lays off due to the COVID-19 pandemic or “under circumstances that are similar to the COVID-19 pandemic,” unless enforcement of the Restrictive Covenant includes 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.
Notice Requirements – Under the Act, Restrictive Covenants are only valid if the employer: (1) advises the employee in writing to consult an attorney before signing the Covenant; and (2) provides the employee a copy of the Covenant 14 days before the employee signs it. However, the employee can voluntarily waive the 14-day notice period. This is a fundamental change that requires employers to “bake in” the concept of notice of Restrictive Covenants prior to an employee’s hiring.
Reformation of Restrictive Covenants – The Act bars courts from “extensive judicial reformation” of a Restrictive Covenant but contemplates that a court may, in its discretion, choose to reform or sever provisions of a Restrictive Covenant rather than hold such covenants unenforceable. The Act also lists the factors that a court may consider when doing so, which include: (1) the fairness of the restraints as originally written; (2) whether the original restriction reflects a good-faith effort to protect a legitimate business interest of the employer; (3) the extent of such reformation; and (4) whether the parties included a clause authorizing such modifications in their agreement. This is a major change to existing Illinois law, which only allows for blue-penciling (i.e., crossing out but not adding) to Restrictive Covenants.
Employees Entitled to Attorneys’ Fees – The Act also changes the dynamics of litigation by allowing for fee-shifting in favor of employees in certain circumstances. Employees are entitled to their attorneys’ fees and costs if they prevail in arbitration or litigation brought by the employer to enforce a Restrictive Covenant. This is in addition to any applicable remedies available under an agreement between the parties or under another statute.
Attorney General Enforcement – Under the Act, the Illinois Attorney General can bring a lawsuit against an employer whom the Attorney General believes is engaged in a “pattern and practice” prohibited by the Act. Before filing suit, the Attorney General may: (1) require an individual or entity to file a statement/report in writing under oath; (2) interview under oath individuals with knowledge of the allegations; or (3) issue subpoenas or conduct hearings as part of the investigation.
In summary, the Act provides a comprehensive statutory framework for how Restrictive Covenants with Illinois employees are to be evaluated under Illinois law. These provisions will be construed carefully by courts in the coming years. Given the Act’s extensive provisions, employers should consult with attorneys to ensure that their covenants are not only enforceable as drafted, but also are properly enforced, and in a manner that does not create liability or Attorney General scrutiny. Taft’s attorneys are well-versed in restrictive covenant drafting, counseling, and litigation, and are happy to answer any questions that employers may have.
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