Following a nationwide trend, Illinois has proposed significant legislation affecting employee restrictive covenants, such as non-compete agreements. While the proposed law does not dramatically change most aspects of the patchwork of Illinois common law, it adds certainty to long-questioned areas and imposes several threshold hurdles and eligibility factors to the test for assessing enforceable restrictive covenants.
On May 31, 2021, the Illinois Senate and House of Representatives passed Senate Bill 672, which amends the Illinois Freedom to Work Act, 820 ILCS 90/(“IFWA”). Expected to be signed into law by Governor Pritzker, the Bill would change the IFWA with respect to the standards required to enter into and enforce employee non-compete agreements. Currently, under the IFWA, employers are prohibited from entering into non-compete agreements with “low-wage” employees, defined as those earning $13.00 per hour or less. The Bill removes the “low-wage” requirement and now joins states like Washington and Maine by imposing an annualized earnings requirement instead. The Bill also codifies restrictions and requirements applying to non-solicit agreements.
Non-Compete and Non-Solicit Terms and Enforceability
Under the Bill, a “covenant not to compete” is defined as an agreement between an employer and an employee entered into after January 1, 2022 “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 employee’s work for the employer included as a party to the agreement.”
The definition also includes an agreement “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.” Thus, programs such as “forfeiture for competition” agreements would be covered by the Bill.
In the first instance, the Bill sets a formal salary threshold for a non-compete to be enforceable. As such, the Bill voids non-compete agreements for employees earning $75,000 per year or less. This amount increases to $80,000 in 2027, $85,000 in 2032, and $90,000 in 2037.
The Bill also applies to employee and customer non-solicit agreements. Under the Bill, a “covenant not to solicit” is an agreement between an employer and an employee entered into after January 1, 2022 that “(1) restricts the employee from soliciting for employment the employer’s employees or (2) 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.”
Adding another salary threshold layer, the Bill voids non-solicit agreements for employees earning $45,000 per year or less. This amount increases to $47,500 in 2027, $50,000 in 2032, and $52,500 in 2037.
In addition, non-compete and non-solicit agreements will be deemed illegal and void unless the employer advises the employee in writing to consult with an attorney prior to signing the agreement and further provides the employee with at least 14 calendar days to review the agreement. The distinction between a void agreement and an unenforceable one may seem semantic, but it is significant. Among other things, a void agreement was never a contract at all and cannot be the subject of a tortious interference claim.
Under the Bill, a non-compete or non-solicit agreement is also illegal and void unless:
“(1) the employee receives adequate consideration,
- the covenant is ancillary to a valid employment relationship,
- the covenant is no greater than is required for the protection of a legitimate business interest of the employer,
- the covenant does not impose undue hardship on the employee, and
- the covenant is not injurious to the public.”
Notably, the Bill permits employees who prevail on an employer’s action to enforce a non-compete or non-solicit agreement to collect all costs and attorney’s fees related to the action. The Bill is not retroactive and does not apply to non-compete or non-solicit agreements entered into prior to January 1, 2022.
Important Considerations
The Bill codifies two important aspects of Illinois common law as it relates to restrictive covenant agreements. First, the Bill adopts the legitimate business interest requirement set forth in Reliable Fire Equipment Co. v. Arredondo, 965 N.E.2d 393 (Ill. 2011). There, the Illinois Supreme Court articulated a standard requiring courts to assess the “totality of the facts and circumstances of the individual case” in determining whether a restrictive covenant protected a legitimate business interest. The Bill provides a near identical requirement stating: “In determining the legitimate business interest of the employer, the totality of the facts and circumstances of the individual case shall be considered.”
Additionally, the Bill adopts the oft-criticized and confusing Fifield “two-year” consideration standard first delineated in Fifield v. Premier Dealer Services., Inc., 993 N.E.2d 938 (Ill. App. Ct. 2013). Under Fifield, an Illinois Appellate Court held that an at-will employee must be employed for at least two years to constitute adequate consideration for restrictive covenant agreements. The Fifield decision resulted in a patchwork of case law in Illinois state and federal courts. Under the Bill, the “adequate consideration” requirement is met if: (1) the employee worked for the employer for two years after signing the non-compete or non-solicit agreement; or (2) the employer otherwise provided adequate consideration to support a non-compete or non-solicit, such as “a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.” What remains unclear is what “professional or financial benefits” will suffice as consideration where the two-year threshold has not been met. Under Fifield, a cash bonus was sufficient. Thus, it seems likely the Bill’s contemplated “financial benefits” include cash bonuses. The Bill does not define “professional benefits,” so employers will be left wondering what non-cash benefits will suffice. For example, does the provision of confidential information suffice? Does a promotion?
Finally, in accordance with Illinois common law, the Bill provides courts the discretion to “blue pencil” non-compete and non-solicit agreements. In deciding whether to reform or sever provisions of an agreement, rather than hold the agreement unenforceable as a whole, the Bill provides the following factors for a court to consider: “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.”
While these provisions will clarify some open questions under Illinois law as it relates to non-compete and non-solicit agreements, they still provide courts with discretion to consider many factors and individual circumstances of each case in determining enforceability. Assuming the Bill passes, there will likely be litigation regarding the open questions discussed above, further clarifying the Bill over time.