Recent Illinois Act Will Change Enforceability of Non-Competition and Non-Solicitation Agreements with Illinois Employees
Illinois Governor JB Pritzker is expected to sign into law SB 672 which would amend and significantly alter the Illinois Freedom to Work Act (the “Act”). Once signed into law, the Act will directly affect the enforceability of non-competition and non-solicitation agreements in Illinois. The Act, which would take effect Jan. 1, 2022, if signed, attempts to provide further protections for lower-wage workers. If Governor Pritzker signs the Act into law, employers should review existing non-competition and non-solicitation agreements to make any necessary alterations before the Act comes into force.
The Act limits those who can be required to enter into non-competition and non-solicitation agreements, outlines the consideration necessary to support such an agreement, sets forth factors which a court should consider in assessing whether such agreements are enforceable, confirm the authority of the courts to modify or “blue pencil” otherwise overbroad agreements, and provide a minimum amount of time for an employee to review and consider entering into such proposed agreements.
Because one of the Act’s goals is to protect the rights of lower-wage earning employees from restrictions, there are key salary thresholds for the applicability of the restrictions to non-compete agreements and non-solicitation agreements with employees:
- The Act will prevent employers from entering into enforceable non-compete agreements with Illinois employees who have expected earnings less than $75,000 per year.
- The Act will also prevent employers from entering into enforceable customer/employee non-solicitation agreements with Illinois employees who have expected earnings of less than $45,000 per year. Both of these salary thresholds will increase over time in five-year increments until reaching $90,000/$52,500, respectively.
Current and new employees must be advised in writing that they can consult an attorney before signing such agreements and must be provided with at least 14 days to review the agreement before being required to sign.
Fundamentally, the Act codifies the common law set forth in the Illinois Supreme Court’s decision in Reliable Fire Equip. Co. v. Arredondo, 2011 IL 111871. The Act now provides that a court must consider the following factors in determining the enforceability of such agreements:
- 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 obtained through the employee’s employment; and
- The time, place, and scope of activity restrictions.
The Act makes clear that courts maintain the ability to modify otherwise overbroad agreements, but are discouraged from extensively reforming an agreement to make it enforceable. In deciding whether such modification is allowed, the court should consider “the fairness of the restraints as originally written, whether the original restriction reflects a good-faith effort to protect a legitimate business interest of the employer, the extent of such reformation, and whether the parties included a clause authorizing such modifications in their agreement.”
An employer would not be able to enter into a non-competition/non-solicitation agreement with an Illinois employee who is terminated, furloughed, or laid off as a result of business circumstances or government orders related to the COVID-19 pandemic unless certain conditions are met. Additionally, a non-competition agreement will be void if entered into with an employee covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act. It would also be void for individuals employed in construction (except for those construction employees who primarily perform management, engineering, or architectural, design, or sales functions for the employer or owners/members/shareholders of the employer).
The Act also provides that such agreement must be supported by independent, adequate consideration. “Adequate consideration” means (1) the employee worked for the employer for at least two years after the employee signed an agreement containing a covenant not to compete or a covenant not to solicit or (2) the employer otherwise provided consideration adequate to support an agreement to not compete or solicit, such as a period of employment plus additional professional or financial benefits, or merely professional or financial benefits by themselves, for example, a signing bonus.
If an employer violates the Act and an employee prevails in a suit to enforce such an agreement, the employee shall recover all costs and reasonable attorney’s fees involved in the court proceeding or arbitration in addition to any other remedies available under the agreement. This provision drastically impacts the use of such agreements and the risks associated with attempting to enforce them. This provision does not state that the employer is precluded from including a similar provision in the agreement (“prevailing party” may obtain reasonable attorney’s fees), but does raise the stakes when an employee departs and violates an agreement that the employer reasonably believes complies with the common law and now the Act.
The Act, if signed into law, will provide employees with an opportunity to argue that an agreement is overbroad and could recover their attorney’s fees if they are successful. The Act may also lead to an increase in employees seeking declaratory relief as to the validity of such agreement and will also likely chill the use of non-competition and non-solicitation agreements as a matter of course. Because the Act has not been signed, there remains a possibility that last-minute changes could be made, as well.
The Illinois Attorney General may also intervene in a case if it has reasonable cause to believe that a person or entity is engaged in a pattern or practice prohibited by the Act and may be awarded a civil penalty or injunction. The Attorney General is also given subpoena and hearing rights to investigate such alleged patterns or practices.
If Governor Pritzker signs the Act as expected, it would not be retroactive.
Employers, however, should review and consider implementing changes to their non-competition/non-solicitation agreements for Illinois employees in advance of Jan. 1, 2022, to comply with Illinois law. Note, that the Act does not apply to agreements prohibiting the use of trade secrets or inventions, invention assignment agreements, a covenant or agreement entered into by a person purchasing or selling the goodwill or ownership interest of a business, clauses requiring advance notice of termination of employment during which time the employee remains employed, or agreements by which the employee agrees not to reapply to the employer after termination of the employee. Courts that have not uniformly applied the two-year consideration rule will now need to re-consider future rulings in light of the Act.
Please contact Dan Graham, Tim Herman, or a member of Clark Hill’s Employment Business Unit with any questions about the impact of the pending legislation and review of your current agreements.