New Illinois Legislation Impacts Employers’ Use of Non-Compete and Non-Solicit Covenants

The Illinois General Assembly recently passed a bill (House Amendment 1 to Senate Bill 672) that significantly amends the Illinois Freedom to Work Act (“IFWA”), 820 ILCS 90/1 et seq., and impacts the legal landscape for employers who use non-compete and non-solicit covenants in Illinois. It is widely anticipated that Governor Pritzker will sign the bill. If so, the law will take effect on January 1, 2022.¹

As discussed below, the bill includes several new conditions precedent to an employer’s enforcement of non-compete and non-solicit covenants with its employees. The bill also establishes new remedies and enforcement mechanisms of which Illinois employers should be mindful. Further, the bill codifies certain common law principles and harmonizes conflicting judicial precedents on the sufficiency of consideration for non-compete agreements. Accordingly, all employers who use non-compete and/or non-solicit covenants for Illinois-based employees should consider whether to enter into new agreements (or amend existing ones) in the next few months. Employers should also begin to take steps to ensure they will comply with the bill’s additional requirements once it is enacted into law.

Effective Date

Assuming Governor Pritzker signs the bill, it will, by its terms, become effective on January 1, 2022. 820 ILCS 90/97. Because the bill’s new provisions do not apply retroactively, an employer’s non-compete and non-solicit covenants with employees that are entered into (or are amended to become effective) prior to the end of 2021 are not subject to the bill’s new requirements.

Advance Notice Requirements

There are two notice requirements with which an employer must comply regarding non-compete or non-solicit covenants entered into with an employee on or after January 1, 2022. First, the employer must advise the employee “in writing to consult with an attorney before entering into the covenant.” 820 ILCS 90/20. Second, the employer must provide the employee with a copy of the covenant at least 14 calendar days before the employee begins working for the employer or with at least 14 calendar days to review the covenant. Id. Failure to comply with these requirements renders the covenant “illegal and void.” Id. An employee may, however, sign the covenant before the 14-day period expires so long as the employee does so voluntarily.

Minimum Compensation Thresholds

For agreements entered into on or after January 1, 2022, the bill sets minimum compensation thresholds for an employer to enforce a non-compete or a non-solicit covenant with its employees. Specifically, for covenants not to compete, an employee’s “actual or expected annualized rate of earnings” as of January 1, 2022, must exceed $75,000 per year. 820 ILCS 90/10(a). For covenants not to solicit, an employee’s actual or expected annualized rate of earnings as of January 1, 2022, must exceed $45,000 per year. 820 ILCS 90/10(b). Violation of these thresholds renders the respective covenant(s) “void and unenforceable.” 820 ILCS 90/10(a)-(b).

The bill defines “earnings” to mean the compensation, including earned salary, bonuses, and commissions, or any other form of taxable compensation reflected on an employee’s Form W-2, plus any elective deferrals, such as 401(k) or 403(b) plan contributions, flexible spending plans and health savings accounts. 820 ILCS 90/5.²

Remedies for Prevailing Employees

Section 25 of the bill is another new provision to which employers should pay particular attention in the course of contemplating and drafting non-compete and non-solicit covenants. Section 25 provides that in addition to remedies available under any agreement between the employer and employee, in a civil action or arbitration that an employer initiates (including a complaint or counterclaim), a prevailing employee “shall recover from the employer all costs and all reasonable attorney’s fees regarding such claim to enforce a covenant not to compete or a covenant not to solicit.” 820 ILCS 90/25. Because this fee-shifting provision is one-way and inures only to the employee’s benefit, an employer should consider including provisions in its agreements that enable the employer to recover its reasonable attorneys’ fees and costs in the event of an actual or anticipated breach by the employee.

Attorney General Enforcement

The bill also establishes a statutory framework for investigation and enforcement by the Illinois attorney general. In particular, Section 30 broadly provides that when the Illinois attorney general has reasonable cause to believe that an employer is engaged in a pattern or practice prohibited by the IFWA, the attorney general may investigate the conduct and may initiate or intervene in a civil action to obtain appropriate relief. 820 ILCS 90/30(a)-(b). The bill provides the attorney general with powers to require sworn written statements, examine witnesses under oath and issue subpoenas or conduct hearings in aid of an investigation. Id. The remedies available to the attorney general also are broad. Such relief may include monetary damages to the State of Illinois; restitution and equitable relief, including temporary restraining orders, preliminary and permanent injunctive relief; and a civil penalty not to exceed $5,000 for each violation (or $10,000 for each repeat violation within a five-year period). 820 ILCS 90/30(d)(1). The penalty applies separately and distinctly to each person who was subject to an agreement that violates the statute.

Covered Non-Compete and Non-Solicit Agreements

The bill includes several defined terms that address, among other things, the scope of coverage under the statute. For example, a “covenant not to solicit” means an agreement entered into after January 1, 2022, that either restricts the employee (1) from soliciting for employment the employer’s employees or (2) from soliciting, for the purpose of selling products or services of any kind to, or from interfering with the employer’s relationships with, the employer’s existing or prospective clients, vendors, suppliers or other business relationships. 820 ILCS 90/5.

A “covenant not to compete” includes employer-employee agreements entered into after January 1, 2022, that restrict an employee based on time, geographic area or similar work for another employer. Id. In addition, a covenant not to compete means an agreement entered into after January 1, 2022, “that by its terms imposes adverse financial consequences on the former employee if the employee engages in competitive activities after the termination of the employee’s employment with the employer.” Id. This additional definition appears to encompass certain restrictive covenants, such as “forfeiture for competition” agreements, that require an employee to forfeit stock or other forms of equity or compensation if the employee begins working for a competitor.

The bill also includes a provision carving out seven types of agreements from the scope of non-compete agreements. Specifically, a covenant not to compete does not include a non-solicit agreement; a confidentiality agreement; an agreement prohibiting use or disclosure of trade secrets or inventions; an invention assignment agreement; a purchase or sale agreement involving the goodwill of a business or disposition of an ownership interest; a garden leave arrangement in exchange for advance notice of termination; or an agreement that an employee will not reapply for employment with the same employer after the employee’s termination. Id.

COVID-19, Public Employees and the Construction Industry

If an employer terminates, furloughs or lays off an employee “as the result of business circumstances or governmental orders related to the COVID-19 pandemic or under circumstances that are similar to the pandemic,” the bill bars enforcement of either a non-compete or non-solicit covenant unless the employer provides compensation “equivalent to the employee’s base salary at the time of termination for the period of enforcement, minus any compensation earned through subsequent employment during the period of enforcement.” 820 ILCS 90/10(c).

In addition, covenants not to compete are “void and illegal” with regard to individuals who are covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act and to individuals employed in construction. 820 ILCS 90/10(d). This prohibition does not apply, however, to construction employees who primarily perform management, engineering, architectural, design or sales functions or who are shareholders, partners or owners in any capacity of the employer. Id.

Clarification and Codification of Illinois Common Law

The bill clarifies and codifies Illinois common law in certain respects. For example, the bill articulates a five-factor test for enforceability of a non-compete or non-solicit covenant. Such a covenant is unenforceable unless (1) the employee receives “adequate consideration”; (2) the covenant is ancillary to a valid employment relationship; (3) the covenant is no greater than required for the protection of a “legitimate business interest”; (4) the covenant does not impose undue hardship on the employee; and (5) the covenant is not injurious to the public. 820 ILCS 90/15.

With regard to “adequate consideration,” the bill provides some clarity on the scope of what is required to support an enforceable restrictive covenant. Specifically, the bill harmonizes conflicting decisions by Illinois’ state and federal courts about whether two or more years of employment is, standing alone, sufficient consideration for enforcement of a restrictive covenant. Under the bill, “adequate consideration” is defined to mean (1) the employee worked for the employer for at least two years after signing the non-compete or non-solicit covenant or (2) the employer otherwise provided sufficient consideration, which “can consist of a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.” 820 ILCS 90/5. The scope of “merely professional or financial benefits” is not defined in the bill but presumably could encompass a wide variety of offerings from an employer to an employee, such as training, publicity, cash payments, raises, bonuses, promotions and stock options.

Further, the bill codifies that the determination of an employer’s legitimate business interest is based on “the totality of the facts and circumstances of the individual case.” 820 ILCS 90/7. The bill includes a list of non-exhaustive factors, though no factor “carries any more weight than any other.” Id. Relevant factors include 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; and the time, geographic and scope of activity restrictions on the employee. Id. The bill explicitly notes that reasonableness must be gauged “not just by some, but by all[,] of the circumstances.” Id. Accordingly, the “same identical contract and restraint may be reasonable and valid under one set of circumstances and unreasonable and invalid under another set of circumstances.” Id.

Reformation of Overbroad Covenants

The bill provides that extensive judicial reformation of non-compete or non-solicit covenants may be against the public policy of Illinois and “a court may refrain from wholly rewriting contracts.” 820 ILCS 90/35(a). But the bill codifies common law by noting that a court may, in its discretion, reform or sever provisions of a non-compete or non-solicit covenant rather than hold such a covenant unenforceable. 820 ILCS 90/35(b). The bill delineates several factors that courts may consider in determining whether to reform a covenant: (1) the fairness of the restraints as originally written; (2) whether the covenant reflects a good-faith effort to protect the employer’s legitimate business interest; (3) the extent of the reformation; and (4) whether the parties’ agreement included a clause authorizing such modifications. Id.

Conclusion

The bill introduces many changes related to the enforcement of non-compete and non-solicit covenants in Illinois. While the bill likely will be enacted into law shortly, the changes do not take effect until January 1, 2022, giving employers in Illinois time to review their existing agreements and to consider amending the agreements or entering into new agreements with existing employees. Employers should also take steps to be ready to implement the new procedural and substantive requirements of the bill in 2022. Because the enforcement of non-compete and non-solicit covenants are highly fact-specific and individualized issues, employers are encouraged to review their use of such agreements carefully and consult with counsel for further guidance.