Illinois recently enacted new legislation amending the Illinois Freedom to Work Act to address the enforceability of non-compete and non-solicitation agreements. This advisory answers key questions about the new legislation.
What types of agreements are covered by this legislation? The legislation applies to covenants not to compete and covenants not to solicit. Covenants not to compete are defined as agreements between an employer and employee that restrict the employee from performing (1) any work for another employer for a period of time, (2) any work in a specified geographic area, or (3) work for a new employer that is similar to the employee’s work for his or her current employer. Agreements that impose “adverse financial consequences” on the employee if the employee competes are also categorized as covenants not to compete under the statute. Covenants not to solicit are defined as agreements between an employer and an employee that restrict the employee from (1) soliciting the employer’s employees or (2) soliciting, for the purpose of selling products or services to, or interfering with the employer’s relationships with, the employer’s actual or prospective clients, vendors, or suppliers.
Does the new legislation bar non-competes and non-solicits? In some circumstances. The legislation bars covenants not to compete with employees whose annual earnings are $75,000 or less and covenants not to solicit with employees whose annual earnings are $45,000 or less. Those compensation thresholds increase every five years until they reach $90,000 for covenants not to compete and $52,500 for covenants not to solicit in 2037. The legislation also bars covenants not to compete with employees covered by collective bargaining agreements under the Illinois Public Labor Relations Act or Educational Labor Relations Act and with many employees in the construction industry. The legislation does not otherwise bar non-competes or non-solicits as long as the other statutory requirements are met.
Under what circumstances will a restrictive covenant be enforceable under the new legislation? The legislation provides that covenants not to compete or not to solicit are “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 a legitimate business interest of the employer, (4) the covenant does not impose undue hardship on the employee, and (5) the covenant is not injurious to the public.”
What constitutes adequate consideration? The Illinois statute provides that there is adequate consideration for a non-compete or non-solicit if (1) the employee works for the employer for at least two years after signing the restrictive covenant agreement or (2) the employer provides other consideration adequate to support a covenant not to compete or not to solicit. This other consideration could consist of employment for less than two years plus additional professional or financial benefits, or professional or financial benefits standing alone. As a practical matter, employers likely will want to provide professional or financial benefits sufficient to constitute consideration at the time of signing unless they want to wait two years for a restrictive covenant to become effective. While the statute is silent as to what “professional or financial benefits” provide adequate consideration, these generally include raises, promotions, incentive compensation (like bonuses, stock options, or RSUs), additional training, or access to additional confidential information or prospective clients.
What legitimate business interests will support non-competes and non-solicits? The new legislation directs that “the totality of the facts and circumstances of the individual case shall be considered” in determining whether an employer has a legitimate business interest. The statute lists a number of non-exclusive factors that may be considered, including the employee’s exposure to the employer’s customer relationships or other employees, the length of customer relationships, the employee’s knowledge of or access to the employer’s confidential information, and the duration, geographic reach and scope of the restrictions imposed by the agreement. The statute specifically recognizes that this is a case-specific analysis, and it explicitly states that identical restrictions may be reasonable and valid in one situation and unreasonable and invalid in another situation.
Can courts narrow or “blue-pencil” restrictions to make them enforceable? Yes, the statute gives courts discretion to reform or sever provisions rather than find an entire covenant unenforceable. Courts contemplating such revisions may consider a number of factors, including the fairness of the original restraints, whether the restrictions reflect good-faith efforts to protect legitimate business interests, the extent of the potential reformation that would be needed, and whether the agreement authorizes such modifications. The statute raises the possibility that an overbroad covenant that was not entered into in good faith will be rejected rather than modified.
Does the new legislation apply to existing contracts? No. The legislation applies to covenants not to compete and covenants not to solicit that are entered into after January 1, 2022. The legislation does not specifically mention amendments to or renewals of existing agreements, so employers and their counsel will need to consider whether an amendment or renewal will bring an existing agreement within the ambit of the statute.
What about confidentiality provisions? The new legislation does not apply to confidentiality provisions.
What about garden leave or notice periods? The legislation does not apply to agreements requiring an employee to provide advance notice of termination of employment as long as the employee remains employed by the employer and receives compensation during the notice period.
Do employers need to give employees advance notice of covenants not to compete and not to solicit? Yes. Under the new statute, the employer must give the employee at least 14 calendar days to review the proposed covenant. The employee can choose to sign the agreement without waiting 14 days, but the employer cannot shorten that period. In addition, the employer must advise the employee in writing to consult with an attorney before entering into the covenant.
What are the consequences for violating the statute? Covenants that violate the statute are generally deemed “illegal and void.” If an employee prevails on a claim to enforce a covenant not to compete or not to solicit, the employee “shall recover from the employer all costs and all reasonable attorney’s fees regarding such claim.” In addition, the legislation authorizes the Attorney General of Illinois to conduct investigations (with subpoena power) and initiate or intervene in civil actions against any person or entity engaged in a pattern or practice that is prohibited by the statute. The Attorney General can seek monetary damages, restitution, or equitable relief, as well as a penalty of up to $5,000 for each violation or $10,000 for each repeat violation of the statute within a 5-year period. It is considered a separate violation for each employee who was subject to an agreement in violation of the statute.
Does the new legislation impact employees terminated due to the COVID-19 pandemic? Yes. The legislation precludes employers from entering into covenants not to compete or solicit with employees who are terminated, furloughed or laid off because of “business circumstances or governmental orders related to the COVID-19 pandemic or under circumstances similar to the COVID-19 pandemic” unless the employee will be paid the employee’s base salary (less amounts earned through subsequent employment) during the restricted period. This provision appears to apply to covenants that are entered into at or after the time of termination.
What steps employers with employees in Illinois consider? Employers should prepare for the legislation to go into force in 2022 by:
- entering into new covenants not to compete or not to solicit with existing employees (if warranted) prior to January 1, 2022;
- reviewing and, where necessary, revising standardized agreements impacting employees in Illinois to ensure that they do not run afoul of the new legislation;
- preparing to give employees the required written notice and time to consider the agreements before requiring employees to sign new covenants not to compete or not to solicit;
- identifying contracts that automatically renew upon expiration and considering whether those contracts will be impacted if they renew after the effective date of the new legislation;
- ensuring that new covenants not to compete or not to solicit are supported by adequate consideration; and
- consulting with counsel about the potential use of notice provisions, garden leave, or confidentiality provisions instead of or in addition to covenants not to compete or not to solicit, particularly with employees who do not meet the compensation thresholds in the new legislation.
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Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2021 Carter Ledyard & Milburn LLP.