Illinois Restrictive Covenant Law: Key Changes, Requirements, and Limitations – KJK

On Aug. 13, 2021, Illinois Governor JB Pritzker signed Illinois Senate Bill 672 (the “Amendment”), an amendment to the Illinois Freedom to Work Act (the “Act”) that significantly limits an employer’s ability to bind employees to restrictive covenants, including non-competition and non-solicitation agreements. The Amendment, which codifies various limitations on restrictive covenants from judicial opinions, applies to non-competition and non-solicitation agreements entered into on or after January 1, 2022, and does not apply retroactively.

It is imperative that Illinois employers are aware of these sweeping changes. The following are key changes, requirements, and limitations on restrictive covenants following the Amendment:

Minimum Salary Requirements

Prior to the Amendment, the Act prohibited employers from entering into non-competition agreements with “low-wage employees”. The Act defined “low-wage employees” as employees who earn $13 per hour or less. The Amendment eliminates the term “low-wage employees” and instead prohibits employers from entering into non-competition agreements with employees earning $75,000 or less per year. Similarly, the Amendment prohibits employers from entering into non-solicitation agreements with employees earning $45,000 or less per year. In addition to salary, employers must also factor in earned bonuses, commissions, wages, tips, and amounts electively deferred by the employee, including 401(k) contributions, to determine whether an employee meets the minimum salary requirements. Through 2037, the salary thresholds will increase to account for inflation. The new minimum salary requirements provide increased worker protection by expanding the number of workers who are not permitted to sign non-competition and non-solicitation agreements.

Construction Industry Prohibition

The Amendment generally prohibits non-competition agreements in the construction industry. However, non-competition agreements may be used for employees whose primary duties include management, engineering, architectural design, and sales in the construction industry. Additionally, shareholders, partners, and owners of construction companies may also be subject to non-competition agreements.

Unionized Workers Prohibition

Non-competition agreements are prohibited for employees covered by collective bargaining agreements under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act.

Review and Consult with Counsel Requirements

Any employee who is asked to sign a non-competition or non-solicitation agreement must be given at least 14 calendar days to review the agreement. Employers are also required to advise the employee, in writing, to consult with counsel prior to signing an agreement containing a restrictive covenant.

Consideration Required

Non-competition and non-solicitation agreements must be supported by adequate consideration. Consideration is a legal term meaning that something of value must be provided to an employee in exchange for signing an agreement containing a restrictive covenant. Specifically, the Amendment defines adequate consideration as either two years of employment after the employee signs the agreement or other consideration adequate to support an agreement. Other adequate consideration can be a period of employment plus additional professional or financial benefits, or just professional or financial benefits so long as they are adequate by themselves. The Amendment does not define the term professional or financial benefits, but it likely encompasses raises, bonuses, promotions, equity awards, specialized training, and/or educational benefits.

Legitimate Business Interest Requirement

A restrictive covenant must be supported by a “legitimate business interest”. To determine whether a “legitimate business interest” exists, the Amendment advises employers to look at the totality of the circumstances. Each individual case should be evaluated based on the specific facts. Relevant factors for employers to consider include the employee’s exposure to customer relationships and other employees, the near permanence of customer relationships, the employee’s acquisition, use, or knowledge of the employer’s confidential information, and the time, place and scope of the restrictions. Employers must ensure that restrictive covenants are narrowly tailored and no greater than required to protect their “legitimate business interest” because the Amendment permits courts to amend overly broad restrictive covenants.

Additional Requirements

In addition to the requirements and prohibitions described in detail above, the Amendment includes several other requirements from judicial opinions, including:

• The restrictive covenant must be ancillary to a valid employment relationship.
• The restrictive covenant must not pose undue hardship on the employee.
• The restrictive covenant must not be injurious to the public.

Special COVID-19 Restrictions

In one of the biggest and most unique changes seen in the Amendment, the Amendment places certain restrictions regarding COVID furloughs. The Amendment prohibits employers from enforcing restrictive covenants against employees who were furloughed or laid-off due to the COVID-19 pandemic. However, employers may enforce non-competition agreements by paying the employee’s base salary from the date of termination through the period of enforcement, minus any compensation earned through subsequent employment.

Penalties

Employers who unsuccessfully attempt to enforce invalid restrictive covenants will be penalized. The Amendment allows employees to recover reasonable attorney’s fees if the employee prevails in a claim filed by their employer seeking to enforce a restrictive covenant. Furthermore, the Amendment allows the Illinois Attorney General to intervene in litigation if there is reasonable cause to believe that the employer is engaged in an illegal pattern or practice. The Illinois Attorney General is also permitted to investigate potential violations of the Amendment and request a civil penalty.

Since this law is already in effect, Illinois employers should confirm their non-compete and non-solicit agreements are still valid to ensure the rights and duties they are looking for, and to avoid penalties for seeking to enforce an invalid restrictive covenant.

If you are an employer affected by Illinois Senate Bill 672 and need assistance in reviewing your restrictive covenant agreements, please contact Rob Gilmore ([email protected]; 216.736.7240) or any of KJK’s Labor & Employment Attorneys.