Effective January 1, 2022, the Illinois Freedom to Work Act (820 ILCS 90/) (the “Act”) was amended to provide new statutory restrictions on Non-Compete and Non-Solicitation Agreements between employers and employees in the state of Illinois.
The Act previously provided restrictions and limitations on Non-Compete and Non-Solicitation Agreements for certain low-wage workers. The amendments to the Act explicitly codified in statutes many of the common law restrictions on Non-Compete and Non-Solicitation Agreements previously placed in such agreements by Illinois courts.
The amendments to the Illinois Freedom To Work Act also dramatically increases the minimum compensation thresholds an employee must meet for a Non-Compete or Non-Solicitation Agreement to be binding on that employee.
What Does Non-Compete and Non-Solicit Mean in Illinois?
The Illinois Freedom To Work Act defines a “Covenant Not to Compete” as an agreement between an employer and an employee that is entered into after the amendments to the Act go into effect and that restricts the employee from performing:
- Any work for another employer for a specified period of time;
- any work in a specified geographical area; or
- work for another employer that is similar to the employee’s work for the employer included as a party to the agreement.
A “Covenant Not to Compete” also includes an agreement between an employer and an employee entered after the amendment to this Act becomes effective and which imposes adverse financial consequences on the former employee if the employee engages in competitive activities after the termination of the employee’s employment.
The Act defines a “Covenant Not to Solicit” as an agreement between an employer and an employee that is entered into after the amendments to the Act go into effect and that:
- Restricts the employee from soliciting for employment the employer’s employees or;
- restricts the employee 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 clients, prospective clients, vendors, prospective vendors, suppliers, prospective suppliers, or other business relationships.
It is important to note that certain agreements are explicitly excluded from the effects of this Act. First, any Covenant Not to Compete or Covenant Not to Solicit entered into prior to the effective date of this Act is not covered. Additionally, the following agreements do not constitute “Covenants Not To Compete Under the Act”:
- Covenant not to solicit;
- a confidentiality agreement or covenant;
- a covenant or agreement prohibiting use or disclosure of trade secrets or inventions;
- invention assignment agreements or covenants;
- a covenant or agreement entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest;
- clauses or agreements between an employer and employee that require the employer to give the employee advance notice of the employee’s termination of employment, during which notice period the employee remains employed by the employer and receives compensation, or
- agreements by which the employee agrees not to reapply for employment to the same employer after termination.
Which Employees Are Not Subject to Non-Compete Agreements?
The Act prohibits Covenants Not to Compete with any employee whose actual or expected annualized rate of earnings is $75,000 or less per year. Earnings include the earned salary, earned bonuses, earned commissions, or any other form of taxable compensation plus any elective deferrals such as a 401(k) plan or health savings account. This amount increases to 80,000 per year on January 1, 2027, 85,000 per year on January 1, 2032, and 90,000 per year beginning on January 1, 2037.
The Act prohibits Covenants Not to Solicit with any employee whose actual or expected annualized rate of earnings is $45,000 or less per year. This amount increases to 47,500 per year beginning on January 1, 2027, 50,000 per year beginning on January 1, 2032, and 52,500 per year beginning on January 1, 2037.
The Act also makes a Covenant Not To Compete void and illegal with respect to individuals covered by collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act.
The Act also makes a Covenant Not to Compete void and illegal for individuals employed in construction unless the construction employee primarily performs management, engineering or architectural, design or sales functions for the employer or the employee is a shareholder, partner or owner in in any capacity of the employer.
Requirements for a Non-Compete For Eligible Employees in Illinois
Assuming an employee is eligible, the Act places specific restrictions on Non-Compete and Non-Solicitation Agreements.
A Non-Compete or Non-Solicitation agreement is illegal and 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.
If an employee is “at-will” then in order for there to be adequate consideration, the employee must work for the employer for at least 2 years after the employee signed an agreement containing a covenant not to compete or a covenant not to solicit or the employer must provide adequate consideration to support the agreement. This other consideration could be a combination of a period of employment plus financial benefits or financial benefits by themselves.
For the agreement to be enforceable, employers must now advise the attorney in writing to consult with any attorney before entering into the covenant and provide the employee with a copy of the covenant at least 14 calendar days before the covenant takes effect or give the employee 14 days to review the covenant. The employee is not required to wait the full 14 days to sign the covenant.
Remedies Regarding The Illinois Freedom To Work Act
One final change that has been made by the Act is that if an employer initiates an action to enforce a Non-Compete or Non-Solicitation Agreement, and the employee is successful, the employee is entitled to receive an award of reasonable costs and reasonable attorney’s fees from the employer.
This change is particularly problematic for employers. As noted above, there are many criteria a non-compete agreement or non-solicitation agreement must meet to be enforceable. The analysis of these elements is subjective. For example, the Act specifically states that, when interpreting whether an agreement has a legitimate business interest for the employer, the facts and the circumstances of each case will be examined. A covenant that may be enforceable under one set of facts will not be enforceable under another. With the essential elements of Non-Compete and Non-Solicit agreements being so subjective, employers are at greater risk of being required to pay attorney’s fees to their employees if they lose litigation to enforce a Non-Compete or Non-Solicitation agreement.
Should Employers Review Their Non-compete Agreements?
With the aforementioned changes, we recommend employers review their Non-Compete and Non-Solicitation agreements. Please feel free to contact our office if you would like to discuss this further.