New Illinois Restrictive Covenant Law: A Primer

Employers in Illinois, beware! On January 1, 2022, an amendment to the Illinois Freedom to Work Act will become effective, creating significant additional restrictions on the use of restrictive covenants in connection with employment. Illinois employers, as well as foreign companies with employees in Illinois, should take time now to review future agreements and ensure that they are compliant with the amended Illinois Freedom to Work Act (IFWA).

Impact of the IFWA

The IFWA applies prospectively to restrictive covenants entered into in connection with employment after January 1, 2022. This includes amendments to preexisting restrictive covenants, as well as agreements with employees who were employed before January 1, 2022, but were not previously subject to a restrictive covenant.

The IFWA also only applies to noncompetes and nonsolicitation covenants (both employee and customer) made in the employment context. Thus, nondisclosure and confidentiality agreements will remain unaffected. Likewise, agreements in which an employee agrees to not reapply for a job at the company after termination are excluded from the IFWA, as are invention assignment agreements and garden-variety leave provisions. Similarly, noncompetes and nonsolicitation agreements entered into outside of the employment context, in connection with the sale of a business for example, are not subject to the IFWA.

Limitations on Noncompetes and Nonsolicitation Agreements

The IFWA bans certain agreements. The IFWA flat out bans noncompetes and nonsolicitation agreements with members of public-sector unions, and with members of the construction industry, although there is a limited exception in the latter for management. Beginning on January 1, 2022, employers in these sectors should remove all noncompetes and nonsolicitation provisions from their employment-related agreements.

The IFWA includes income limitations on enforceability. The IFWA also renders unenforceable all noncompetes with employees earning less than $75,000 annually, and all nonsolicitation agreements with employees earning less than $45,000 annually. The $75,000 annual threshold on noncompetes will increase by $5,000 every five years, topping out at $90,000 in 2037. The $45,000 annual threshold on nonsolicitation agreements will likewise increase every five years, but only by $2,500, topping out at $52,500 in 2037.

In calculating earnings for purposes of determining whether an employee meets either of these minimum earnings thresholds, employers should not simply rely on salary/wages. Rather, the earnings calculation must include salary, earned bonuses, commissions, wages, tips, amounts electively deferred by the employee (such as 401(k) contributions and 403(b) plans), HSA and FSA plans and contributions, and commuter benefit deductions.

The IFWA includes COVID-19-related limitations on enforceability. Additionally, the IFWA mandates that noncompetes and nonsolicitation agreements are unenforceable if the employee is terminated or laid off as a result of specified circumstances related to COVID-19.

The IFWA includes length of employment, notice period, and other limitations. The IFWA also contains several mandates relating to consideration and procedure for restrictive covenants:

• The IFWA requires at least two years of postexecution, continued employment for any restrictive covenant subject to the IFWA to be enforceable. As a practical matter, this means that if an employee signs a restrictive covenant when hired and is subsequently laid off within two years, the covenant is unenforceable. The IFWA provides an exception to this rule if the employer provides “additional professional and financial benefits” instead of two years of continued employment. However, the IFWA does not define these terms, nor is there any regulatory guidance.
• Employers must provide a copy of the restrictive covenant to employees at least 14 days before their employment begins. Employers must also advise the employees in writing to speak with an attorney before signing the restrictive covenant.
• The IFWA largely codifies Illinois common law and provides that any noncompete or nonsolicitation agreement is void unless it meets each of the following requirements:
  
  
  • 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.
  • The covenant is not injurious to the public.

Penalties and Enforcement

Employers will face stiff consequences for attempting to enforce noncompetes and nonsolicitation agreements that violate the IFWA. An employee who prevails on an employer’s claim to attempt to enforce a violative covenant will recover attorney fees and costs.

In addition, the IFWA empowers the state attorney general’s office to investigate employers who may be engaged in a “pattern or practice” of violative behavior. If they are found to be, the attorney general may impose a civil penalty of $5,000 for each violation or $10,000 for each repeat violation within a five-year period.

Four Key Takeaways for Employers

The IFWA continues the trend of increasing hostility toward restrictive covenants required in connection with employment. With both that trend and the specific provisions of the IFWA in mind, it is advisable to do the following:

1. Review all employment-related agreements now to ensure that they are fully compliant with the IFWA beginning on January 1, 2022, and have your counsel do the same.
2. Remember that the fee-shifting and civil penalty provisions apply to any violation of the IFWA.
3. Keep abreast of developments in those areas of law and routinely consult counsel.
4. Reconsider whether it is really necessary to include a noncompete and/or nonsolicitation provision in the employment agreements of various categories of employees. Aside from the IFWA, courts are becoming increasingly hostile to restrictive covenants that adversely impact someone’s ability to work. To that end, although the IFWA places its limitations at the $75,000 and $45,000 thresholds, consider a (perhaps significantly) higher internal threshold, such that only truly vital employees are subject to restrictive covenants.