Employers: Restrictive Covenant Reform Is Coming to Illinois in 2021

Recently, the Illinois General Assembly passed legislation significantly amending the Illinois Freedom to Work Act, which governs the legality and enforceability of non-compete agreements and other post-employment restrictive covenants. If the proposed legislation becomes law, it will impose some new disclosure requirements on employers and prohibit the use of restrictive covenants for employees below certain salary thresholds. It will also provide some limited clarity as to when restrictive covenants can be used, but in other respects, it may perpetuate the ongoing confusion and uncertainty surrounding the enforceability of post-employment restrictive covenants.

If signed by Governor Pritzker as expected, the effective date of the new law will be January 1, 2022 and will apply only to restrictive covenants entered into after that date. The bill does not apply to confidentiality agreements, prohibitions on the disclosure of trade secrets, or invention assignment agreements. Several of the Act’s provisions codify existing case law.  For example, the bill provides that a non-compete or non-solicit must be supported by “adequate consideration;” cannot be greater than required for the protection of a “legitimate business interest;” and, the covenant cannot impose undue hardship on the employee or be injurious to the public.

In addition, the legislation codifies existing Illinois case law which requires that in order for a restrictive covenant to be supported by “adequate consideration” the employee must work at least 2 years after signing the agreement or the employer must otherwise provide additional professional or financial benefits. When determining whether the restriction is supported by a “legitimate business interest” the legislation codifies existing case law that requires courts to consider “the totality of facts and circumstances of the individual case,” including: (1) the employee’s exposure to customer relationships or other employees, (2) the near-permanence of customer relationships, (3) the employees’ acquisition, use, or knowledge of confidential information, and (4) the scope of time, place or activity restrictions. Also consistent with existing case law, the bill states that “extensive reformation” of covenants “may be against public policy” but does allow a court, in its discretion, to reform or sever provisions of a non-compete or non-solicit rather than deem the covenant unenforceable. In so doing, courts may consider factors such as the fairness of the restraints, whether the original restriction reflects a good-faith effort to protect a legitimate business interest, the extent of such reformation, and whether the parties included a clause authorizing such modifications in their agreement.

The legislation also imposes significant new restrictions on the use of restrictive covenants in specific circumstances including:

1. Prohibiting restrictive covenants for employees covered by collective bargaining agreements under the Illinois Public Labor Relations Act or the Illinois Education Labor Relations Act and employees in construction, except those serving in management, engineering, architectural, design or sales functions.
2. Prohibiting non-competition agreements for employees who earn $75,000 per year or less. This salary threshold will increase every five years by $5,000.
3. Prohibiting non-solicit agreements for employees who earn $45,000 per year or less. This amount is scheduled to increase every five years by $2,500.
4. Prohibiting restrictive covenant agreements with employees who lost their jobs due to the pandemic or under similar circumstances unless enforcement includes compensation equivalent to the employee’s base salary for the period of enforcement.
5. Requiring employers to advise employees in writing to consult with an attorney before entering into a restrictive covenant agreement and give employees at least 14 days to review. It also allows employees who prevail on claims filed by employers to recover all costs and reasonable attorney’s fees in addition to other appropriate relief. The bill does not address situations where a court only partially enforces or reforms a covenant.
6. The Attorney General may also investigate if it has reasonable cause to believe that any person or entity is engaged in a practice prohibited by the Act and may assess civil enforcement penalties against employers ranging from $5,000-$10,000 per violation.

While the intent of this legislation is to provide clarity, there are certainly some ambiguities left to be litigated. We will continue to monitor this bill and advise clients on how it will impact their use of restrictive covenants. We expect that employers will need to update their agreements and consider the implications of these new requirements before the new year. Employers should also be advised that there is a short window to execute restrictive covenant agreements prior to the Act taking effect. Please reach out to a Franczek attorney for more information.