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December 15, 2021 Articles

Amendments to the Illinois Freedom to Work Act: Sweeping Changes Are on the Horizon

Employers and practitioners must be aware of some of the key financial and legal risks created by the amendments. These risks come in two potentially painful flavors.

By Michael P. Avila

In the last five years, 10 states (Maine, Maryland, Massachusetts, New Hampshire, Nevada, Oregon, Rhode Island, and Virginia) have enacted laws regulating non-competes, joining states such as California and Oklahoma (which have long effectively banned non-competes). Now the state of Illinois has joined that movement, with a new law that places significant restrictions on non-compete agreements. Below, we explain what this new law has in store for employers.

On August 13, 2021, Illinois Governor J.B. Pritzker signed into law amendments to the Illinois Freedom to Work Act (IFWA) that will greatly limit the enforceability of employee restrictive covenant agreements in the state of Illinois and create substantial financial risk for employers that do not abide by these new limitations.

Restrictive covenant practitioners may recall that in 2016, Governor Pritzker’s predecessor, former governor Bruce Rauner, signed the IFWA into law, with an effective date of January 1, 2017. At that time, the IFWA simply curtailed the use of non-compete agreements with “low-wage earners,” which the IFWA originally defined as “an employee whose earnings do not exceed the greater of (1) the hourly rate equal to the minimum wage required by the applicable federal, state, or local minimum wage law or (2) $13.00 per hour.” On May 31, 2021, however, the Illinois General Assembly passed into law the sweeping amendments set to take effect on January 1, 2022, which Governor Pritzker signed and approved.

The changes carried out by the amendments are wide ranging, and noncompliance will carry new risk, both in terms of private litigation and Illinois attorney general enforcement actions. Further, the amendments address both employee noncompetition and non-solicitation agreements. Given the gravity of the amendments, employers and practitioners would be well advised to fully understand the key changes and the impact they will have on the restrictive covenant landscape in Illinois. This article explores what we presently know—and do not know—about the amendments.

First, What Agreements Are at Issue?

The amendments apply to employee noncompetition and non-solicitation agreements entered into on or after January 1, 2022; they do not apply retroactively. Further, non-solicitation agreements (referred to as “covenants not to solicit” in the statutory text) are defined as agreements not to solicit (i) fellow employees and (ii) “the employer’s clients, prospective clients, vendors, prospective vendors, suppliers, prospective suppliers, or other business relationships.” That said, the amendments do not apply in several scenarios. For example, confidentiality and intellectual property assignment agreements are expressly carved out of the amendments’ domain. In addition, the amendments do not apply to garden-variety leave agreements through which an employee is given advance notice of termination but kept on as an employee during the interim period of garden leave.

As is common among similar state statutes around the country, the amendments also do not apply to restrictive covenants entered into in connection with the sale of a business. The amendments define this as “a covenant or agreement entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest . . . .” However, without a further definition of what it means to “aquir[e] . . . an ownership interest,” it is presently unclear whether the amendments would apply to agreements entered into with employees in exchange for the receipt of equity in the employer’s business.

New Consideration Requirements (Almost) Resolve the “Adequate Consideration” Debate

As any first-year law student will tell you, one of the fundamental underpinnings of a contract is consideration. And this is, of course, true for employee restrictive covenants. However, Illinois state and federal courts have long grappled with what, exactly, constitutes “adequate consideration” for an employee restrictive covenant agreement. For example, in 2013, the Illinois Appellate Court held, in Fifield v. Premier Dealer Services, Inc., that continued employment was not adequate consideration for the execution of an employee restrictive covenant agreement, unless execution and enforcement were separated by at least two years of continued employment. On the other hand, the U.S. District Court for the Northern District of Illinois has refused to follow Fifield, including in its 2017 holding in Stericycle, Inc. v. Simota. Now, through the amendments, the Illinois General Assembly has been heard on the issue, and it has sided with the Illinois Appellate Court.

Specifically, as of January 2022, employers must provide at least two years of continued employment or “additional professional or financial benefits” to meet the IFWA’s new “adequate consideration” requirement. The problem is, however, the amendments do not provide statutory guidance concerning the sort or amount of the “additional professional or financial benefits” that may be required. Thus, the common-law battle on this issue may not be entirely concluded.

In addition to the general consideration aspects of the amendments, there are prerequisites to enforcement of a noncompetition or non-solicitation agreement against an employee who was terminated or furloughed due to the business impacts of the COVID-19 pandemic or “circumstances that are similar” thereto. In such a scenario, an employer must provide leave compensation equal to the employee’s final base salary for any period of enforcement, less any earnings from a new employer. This provision of the amendments may cause confusion and frustration among employers. For example, in the non-solicitation context, an employer that terminates an employee due to COVID-19 cutbacks—or due to a “similar” catalyst—may be forced to continue compensating the employee to avoid the employee soliciting the employer’s customers after the employee secures a new job. Further complicating matters, the amendments do not address whether an employee must provide the former employer with employment status or income updates.

Show Me the Money: Income Thresholds for Enforceability

As discussed above, the original IFWA precluded the use of non-compete agreements with Illinois low-wage earners. However, the amendments thereto will now impose far greater and progressive restrictions on both non-compete and non-solicitation agreements.

Employers will no longer be able to require employees to sign non-compete agreements unless “the employee’s actual or expected annualized rate of earnings exceeds $75,000 per year.” Moreover, this threshold will increase as follows:

  • $80,000 per year beginning on January 1, 2027;
  • $85,000 per year beginning on January 1, 2032; and
  • $90,000 per year beginning on January 1, 2037.

Absent an employer establishing that a subject employee earned at, or in excess of, this threshold, a non-compete agreement will be “void and unenforceable.”

Similarly, employers will no longer be able to require employees to sign non-solicitation agreements unless “the employee’s actual or expected annualized rate of earnings exceeds $45,000 per year.” This threshold will also increase, as follows:

  • $47,000 per year beginning on January 1, 2027;
  • $50,000 per year beginning on January 1, 2032; and
  • $52,500 per year beginning on January 1, 2037.

Further, breach of this income threshold requirement will render a non-solicitation agreement void and unenforceable.

Unfortunately, the amendments do not provide a clear method to calculate expected annualized earnings. For that reason, the “expected” or “actual or expected annualized rate of earnings” may create a litigation flash point, particularly with employees who are subject to commission-based or bonus-heavy compensation structures.

The Devil Is in the Details: Mandatory Attorney Review Period for Employees

One area of potential administrative headache resides in section 20 of the amendments, which requires:

A covenant not to compete or a covenant not to solicit is illegal and void unless (1) the employer advises the employee in writing to consult with an attorney before entering into the covenant and (2) the employer provides the employee with a copy of the covenant at least 14 calendar days before the commencement of the employee’s employment or the employer provides the employee with at least 14 calendar days to review the covenant.

This language creates a two-fold risk of invalidation during the drafting and administrative rollout processes. With respect to the former, restrictive covenants typically contain language cautioning employees to review the agreement with counsel. However, such language will now be virtually talismanic in Illinois. As to the latter issue, employees will now need to receive two full weeks to consider the terms of a restrictive covenant. This timing mandate will require administrative care to avoid “complications.” For example, many employers provide restrictive covenants along with other onboarding documents. If these documents are not provided at least two weeks before an employee’s start date, the employee could then refuse to sign the restrictive covenant after the start of employment, thereby creating potential conflict with a then-current employee.

A Lawyer’s Favorite Four-Letter Word: Risk

Last, but certainly not least, employers and practitioners must be aware of some of the key financial and legal risks created by the amendments. These risks come in two potentially painful flavors.

First, under section 25 of the amendments, an employee “shall” be entitled to collect “all costs and all reasonable attorney’s fees” if the employee prevails in a court action or arbitration filed by the employer, to enforce a noncompetition or non-solicitation agreement. This may be viewed by some as leveling the playing field, insofar as many employee restrictive covenants contain one-sided cost recovery clauses in favor of the employer. Nonetheless, this statutory departure from the American Rule may alter the risk-weighted decision to pursue enforcement litigation, particularly for employers of lesser financial means. On the other hand, section 25 applies only to claims and counterclaims filed by an employer. Thus, an employee would not be statutorily entitled to recover fees and costs if the employee prevails in an affirmative declaratory judgement action seeking to invalidate a restrictive covenant.

The second potential risk comes in the form of an Attorney General’s Office investigation and enforcement action. Under section 30, the amendments expressly authorize the Illinois attorney general to bring a civil action on behalf of the “People of the State” against “any person or entity . . . engaged in a pattern and practice prohibited by this Act. . . .” Further, the amendments permit the attorney general to seek both equitable relief and compensatory damages, including penalties of $5,000 per violation or $10,000 for each repeat violation within a five-year period.

Given how vocal Illinois Attorney General Kwame Raoul has been concerning his view that noncompetition agreements are “career obstacles for workers in Illinois and across the nation,” section 30 of the amendments should be taken into careful consideration by Illinois employers. Indeed, Attorney General Raoul has made it clear that he intends to pursue employers who overstretch the bounds of lawful employee restrictive covenant agreements. Further, he will be in an election year when the amendments become effective in 2022.

At bottom, the amendments may truly alter the employee restrictive covenant landscape in Illinois, and there is meaningful risk to employers who refuse to adapt. Over the next several months, it will be critical to ensure that outside practitioners and in-house counsel take a close look at our clients’ restrictive covenant regimes, to avoid accidental exposure, both to the risk of invalidation and the risk of a negative litigation event.

Michael P. Avila is a partner in the Philadelphia, Pennsylvania, and Washington, D.C., offices of Fisher & Phillips LLP.

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