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Illinois Freedom to Work Act Amendments Aim to Reshape Employee Non-Compete and Non-Solicitation Agreements

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Illinois Freedom to Work Act Amendments Aim to Reshape Employee Non-Compete and Non-Solicitation Agreements

The landscape regarding non-competition and non-solicitation agreements in Illinois is expected to change dramatically due to a bill recently passed by the Illinois Legislature and which is expected to be signed by Governor Pritzker.  The amendments to the Illinois Freedom to Work Act (“IFWA”) apply to Non-Competition and Non-Solicitation agreements signed on or after January 1, 2022, but would not apply retroactively. 

Restrictive Covenants and Current Illinois Statutory Landscape

Non-Competition and Non-Solicitation agreements, often referred to more generally together with confidentiality agreements as restrictive covenants, limit the competitive activity of current and former employees for the benefit of their employer. Restrictive covenants may be included in employment agreements, compensation plans, or stand-alone restrictive covenant agreements. Non-Competition agreements restrict an employee from performing work for a competing employer for a specified period of time, typically within a defined geographic area. Non-Competition agreements may also impose adverse financial consequences on former employees for engaging in competitive activities after the termination of their employment. Non-Solicitation Agreements, on the other hand, typically restrict a former employee from soliciting the employer’s employees for employment or the employer’s current and/or prospective customers, suppliers, or clients for business.

The current IFWA prohibits Non-Competition agreements between an employer and any “low-wage” employees—those who earn the greater of an hourly rate equal to the applicable federal, state or local minimum wage, or $13 per hour. In most cases, the applicable threshold is $13 per hour, but because the minimum wage in Chicago is currently higher than $13 per hour, Non-Competition agreements with employees earning a higher wage rate are prohibited in Chicago.

Summary of Changes to Certain Non-Competition and Non-Solicitation Agreements

Increase to Minimum Compensation Level

The amended IFWA would dramatically limit an employer’s ability to restrict former employees’ ability to compete or solicit post-employment, including by:

  1. prohibiting Non-Competition Agreements with any employees who earn less than $75,000 per year; and
  2. prohibiting certain types of Non-Solicitation Agreements with employees who earn less than $45,000 per year.

The amendments also set forth the types of compensation which can be included to meet the salary thresholds, including earned salary, bonuses, and commissions. 

COVID-19-Related Separation Provisions

The amended IFWA states that any Non-Compete or Non-Solicitation Agreement with any employee who the employer terminates, furloughs or lays off as the result of “business circumstances or governmental orders” related to the COVID-19 pandemic or “under circumstances that are similar to the COVID-19 pandemic” is void unless the agreement provides the employee with compensation equal to the employee’s base salary at the time of termination for duration of the covenant, less compensation earned through subsequent employment. In effect, this provision requires that employers provide a version of “Garden Leave” to departing employees in order to enforce restrictive covenants against employees who are separated for COVID-19- related reasons.

Adequate Consideration Required

In order to be enforceable starting in 2022, restrictive covenant agreements in Illinois must also be supported by “Adequate Consideration.” Under the amended IFWA, Adequate Consideration is defined as follows:

  1. the employee worked for the employer for at least two years after the employee signed an agreement containing a Non-Competition or Non-Solicitation agreement; or
  2. the employer otherwise provided consideration adequate to support a Non-Competition or Non-Solicitation agreement, which can include a period of employment plus additional professional or financial benefits, or merely professional or financial benefits adequate by themselves. 

The amended IFWA essentially codifies Illinois case law which states that “at-will” employment or continued at-will employment alone is insufficient consideration to support Non-Competition or Non-Solicitation agreements if the employment lasts for less than two years.

Informed Consent, Attorney’s Fees, and Other Enforcement Provisions

In addition to the above, employees must be provided with informed, written consent prior to entering into any restrictive covenant. Therefore, any Non-Compete or Non-Solicitation agreement is void under the amended IFWA unless an employee is (i) advised in writing to consult an attorney before entering into the agreement; and (ii) the employer provides the employee at least 14 calendar days to review the agreement.

Additionally, the bill allows an employee to recover attorneys’ fees, and possibly other “appropriate relief,” if the employee prevails on a claim filed by an employer seeking to enforce a restrictive covenant. The Illinois Attorney General would also be able to bring an action against an employer if it can show a pattern or practice of noncompliance of the amended IFWA by the employer, which can result in a civil penalty of up to $5,000 for each violation or $10,000 for each repeat violation within a five-year period, in addition to monetary damages, equitable relief and other appropriate relief.

Finally, the amended IFWA would allow courts to reform or sever provisions of a Non-Competition or Non-Solicitation provision instead of finding the covenant unenforceable. A recommended best practice is to include a provision in any restrictive covenants agreement which allows a court to “blue pencil,” or reform any otherwise unenforceable provision.

Exceptions and Carve-Outs

The amended IFWA provides several key exceptions to its provisions, including clarifying that the following are not considered Non-Compete agreements, or covenants not to compete: (1) confidentiality clauses; (2) a covenant prohibiting the use or disclosure of company trade secrets or inventions; (3) an agreement entered into by a person acquiring or selling an ownership interest in a business; (4) a clause requiring advance notice of termination, during which notice period the employee remains employed and receives compensation; and (5) an agreement that the employee not reapply for employment by the same employer after termination.

Employers should review their existing employee restrictive covenants, particularly any Non-Competition and Non-Solicitation agreements, including those contained in employment agreements or compensation agreements.

If you have any questions regarding these important changes to Illinois law, or if you would like to discuss your existing agreements or other restrictive covenants with prospective or current employees to ensure compliance with applicable law, please contact Abad Lopez or your Dykema relationship attorney.

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