Illinois Employers Have Limited Time To Prepare for the New Restrictive Covenant Law - It Takes Effect on 1/1/2022

On August 13, 2021, Illinois Governor J.B. Pritzker signed a new law impacting covenants not-to-compete and non-solicitation agreements (as to both employees and customer solicitations) in the state of Illinois. Public Act 102-0358 will take effect on January 1, 2022 and will police all such agreements entered into on or after that date. Prior to the signing of the Act, the validity of non-compete and non-solicitation agreements in Illinois was decided by the courts under Illinois common law and the prior version of the Illinois Freedom to Work Act, effective January 1, 2017. 
 
The new law amends the Illinois Freedom to Work Act. The most significant changes enacted by the new law are described below.

Prior to January 1, 2022 Beginning January 1, 2022 Compensation Thresholds: Non-Competition Agreements Absolute prohibition on the use of non-compete agreements with low-wage workers, defined as those making less than $13/hour. Covenants not-to-compete will be invalid as against employees earning the following compensation in years: 2022 – $75,000 or less 2027 – $80,000 or less 2032 – $85,000 or less 2037 – $90,000 or less These amounts include all sources of taxable income from employment.   Compensation Thresholds: Non-Solicitation Agreements Non-solicitation agreements not limited by the amount of an employee’s compensation. Non-solicitation agreements will be invalid as against employees earning the following compensation in years: 2022 – $45,000 or less 2027 – $47,500 or less 2032 – $50,000 or less 2037 – $52,500 or less These amounts include all sources of taxable income from employment.   Collective Bargaining Agreements Non-compete and non-solicitation agreements possibly enforceable against employees covered by a collective bargaining agreement. Non-competes and non-solicitation agreements will not be enforced against employees covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act.   COVID-19 Non-compete and non-solicitation restrictions not limited by COVID-19. Non-competes and non-solicitation agreements will not be enforced against employees who have been terminated, furloughed, or laid off as a result of COVID-19 or to “circumstances that are similar to the COVID-19 pandemic,” unless it includes compensation equal to the employee’s base salary at the time of termination for the period of enforcement minus compensation earned through any subsequent employment.   Notice Requirement re:  legal counsel No employer obligation to inform employees of the right to seek legal counsel. Employers now required to inform employees of their right to consult with an attorney. Review period No mandatory review period required. Employers now required to give employees 14 days to review non-compete and non-solicitation agreements. Employees may voluntarily waive the review period and sign any such agreement early.   Attorney General Oversight Illinois Attorney General has no specific oversight of non-compete and non-solicitation agreements. The Illinois Attorney General’s office will oversee non-compete and non-solicitation agreements and may take action against employers who violate the Act. Accordingly, the Attorney General is authorized to seek compensatory or equitable remedies against employers, and may additionally seek civil penalties of $5,000 for the first violation and $10,000 for each subsequent violation within a five-year period, which penalties are deposited into a State fund and not awarded to the employee. NOTE:  This is in addition to the remedies available under any agreement between the employer and an employee or under any other statute.   Fee Shifting No employee right to receive attorney’s fees when an employer brings a lawsuit to enforce a non-compete or non-solicitation agreement. An employee can now recover (the statute states “shall recover”) attorney’s fees and costs from the employer if the employee prevails in a lawsuit to enforce a non-compete or a non-solicitation agreement.   NOTE: The new law does not include language providing for prior-employer’s statutory recovery of attorney’s fees and costs.   Adequate Consideration Illinois courts historically required employers to show that, in addition to continued employment, “adequate consideration” was provided for non-compete and non-solicitation agreements as a requirement to enforce the provision(s). The Act adopts the “Fifield Rule” (Eric Fifield and Enterprise Financial Group, Inc. v. Premier Dealer Services, Inc., 993 N.E.2d 938 (Ill. App. Ct. 2013)) by defining the adequate consideration necessary to support enforcement of non-compete and non-solicitation agreements as: The employee has worked for the employer for at least two years after the employee signed the non-compete or the non-solicitation provision(s); or The employer otherwise provided consideration adequate to support a non-compete or non-solicitation provision, consisting of a period of employment plus additional professional or financial benefits. Totality of the Circumstances Analysis Courts typically took a “totality of the circumstances” approach to determine the validity of non-compete and non-solicitation agreements. The Act requires a totality of the circumstances analysis by courts to determine the validity of a non-compete or non-solicitation agreement, and to consider factors such as: Employee’s exposure to the employer’s clients or patients; Near permanence of the employer’s relationship with its clients or patients; Employee’s use or acquisition of the employer’s confidential information; Length of time restrictions involved in the provisions; Extent of any geographical restrictions in the provisions; and Scope of activities being restricted.

Notably, under the new law, covenants covering confidentiality; non-disclosure or use of trade secrets and confidential information; invention assignment; and reapplication of employment, do NOT constitute non-compete agreements covered by the new Act or prior law. Further, the Act does not bar or affect the use of non-competes or non-solicitation agreements with the owners and buyers/sellers of a business in connection with acquisitions. The new law likewise does not affect or prohibit “garden leave” provisions, i.e., where the employee receives advance notice of termination, during which notice the employee continues to be “employed” and paid by the employer.

The new law also expressly codifies an extended application of the “blue pencil” doctrine, allowing an Illinois court to rewrite unenforceable provisions of non-compete agreements to make them reasonable and enforceable. In doing so, courts must consider factors such as: fairness of the restrictions as originally drafted; whether the original restrictions reflect a good faith effort to protect a legitimate business interest of the employer; the extent of the reformation; and whether the parties agreed to authorize modification of the agreement when executed. It also bears noting that the Act makes clear that “[e]xtensive judicial reformation of a covenant not to compete or covenant not to solicit may be against public policy . . . and a court may refrain from wholly rewriting contracts.”

Questions Regarding the New Law Remain Unanswered
Of note, the new law does not impact agreements entered into prior to January 1, 2022. But, at the same time, the new law does not answer the question of whether it impacts agreements that are renewed or merely modified on or after January 1, 2022. It likewise does not answer the question of whether the new law applies to agreements signed in 2021 for employment commencing in 2022.

The New Law Comes on the Heels of the Presidential Executive Order on Promoting Competition in the American Economy
The new Illinois law comes on the heels of President Biden’s Executive Order on Promoting Competition in the American Economy, which was signed on July 9, 2021.[1] This Executive Order encourages the Federal Trade Commission to “consider . . . exercis[ing] the FTC’s statutory rulemaking authority . . . to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit work mobility.”

In addition, several states across the country have similarly entered into the fray and prohibited the enforcement of non-compete agreements, specifically, for low wage workers.[2] For illustrative purposes, Massachusetts prohibits non-compete agreements for employees classified as nonexempt under the Fair Labor Standards Act; Maine at 400% of the federal poverty level; Maryland at $15 per hour or $31,200 annually; New Hampshire at $14.50 per hour; Rhode Island at 250% of the federal poverty labor or those individuals nonexempt under the FLSA; Virginia at the average weekly wage in Virginia; Washington at $100,000 for employees or $250,000 for independent contractors (both annually); Oregon at $100,533, and Nevada at the wage threshold of whether an employee is paid solely on an hourly wage basis. As the workforce shortage across the county continues, the tightening of restrictive covenant laws and regulations will likely become a growing trend both federally and across the country.

Illinois Employers Should Review their Agreements for Compliance
As for Illinois employers, they should begin reviewing their practices and standard documents related to restrictive covenants now to ensure compliance by January 1, 2022. Although the new law does not appear to apply to agreements entered into and in place prior to the effective date, employers should have a plan in place for new agreements going forward.

Please contact Paul Sweeney at (317) 236-5894 or paul.sweeney@icemiller.com, Heather Renée Adams at (312) 726-7312 or heather.adams@icemiller.com, Sloan Holladay-Crawford at (317) 236-5930 or sloan.holladay-crawford@icemiller.com or another member of Ice Miller LLP's Labor, Employment and Immigration Practice Group if you have any questions regarding this article.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.