Illinois Freedom to Work Act Imposes New Restrictions on Restrictive Covenants
Labor & Employment 06/09/21 Brian Hartstein
Joining a recent slew of other states, the Illinois legislature recently passed a law limiting the use of restrictive covenants and codified existing case law around their enforcement and interpretation. The law, which significantly amended the Illinois Freedom to Work Act (Act), is expected to be signed by Governor Pritzker and provides a variety of new issues for employers to consider in drafting and enforcing restrictive covenant agreements. The law would go into effect on January 1, 2022 and governs agreements entered into on or after that date. The most prominent changes within the Act are described below.
Absolute Prohibition below Certain Compensation Thresholds
The Illinois Freedom to Work Act previously imposed an absolute prohibition on the use of restrictive covenants with low-wage workers -- those making less than $13/hour. The amendments to the law expand those absolute restrictions on the enforcement of non-compete agreements and non-solicitation agreements at different earnings thresholds.
Under the amendments to the law, employers cannot enter non-compete agreements with any employee whose earnings do not exceed $75,000 per year. The earnings threshold for this requirement rises over a 15-year window, moving to $80,000 per year in 2027, $85,000 in 2032 and $90,000 in 2037.
Similarly, employers cannot enter non-solicitation agreements for any employee whose earnings do not exceed $45,000 per year. Similarly, this threshold increases on a similar timetable as those for the non-compete ($47,500 in 2027; $50,000 in 2032; $52,500 in 2037).
The law defines earnings broadly to included salary, earned bonus, earned commission and other forms of taxable compensation reflected or expected to be reflected on an employee's W-2 along with any amounts contributed in support of employee benefits.
The law also includes COVID specific restrictions on the enforcement of restrictive covenants, disallowing them for any employee terminated, furloughed or laid off as a result of "business circumstances or government orders related to the COVID-19 pandemic" or similar circumstances, unless it includes compensation equivalent to the employees base salary at the time of termination for the period of enforcement minus compensation earned through subsequent employment.
There are also absolute prohibitions on these agreements for certain public employees and most non-management or non-administrative workers in the construction industry, such as laborers and tradesman.
Clarifying Existing Law
Rather than create an entirely new framework that deviates from existing case law, for the most part, the law serves to codify and clarify existing requirements around the enforceability of non-competes and non-solicitation agreements providing certain explicit requirements that mirror the existing tests used by the courts in Illinois.
As a basic framework, the law requires that in order to have an enforceable non-compete or non-solicitation agreements: 1) there is adequate consideration; 2) it is ancillary to a valid employment relationship; 3) it is no greater than required to protect legitimate business interests; 4) it does not impose an undue hardship on the employee; and 5) it is not injurious to the public.
In addressing the adequacy of consideration, the law essentially codifies Fifield v. Premier Dealer Services, Inc. 2013 IL App (1st) 12032 where the First Appellate District ruled that absent additional consideration an employee must have worked for an employer for a least two years to have a restrictive covenant enforced against them. While this precedent had been followed by most state courts rulings that addressed the issue, some judges in federal courts, including in the Northern District of Illinois, had rejected this interpretation.
Following from Fifield's holding, the new law defines adequate consideration to mean either that "the employee worked for the employer for at least 2 years after the employee signed an agreement" containing restrictive covenants or was provided consideration "adequate to support an agreement to not compete or to not solicit" which "can consist of a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves."
What constitutes "adequate" financial or professional benefits is not explicitly defined and will likely be the subject of future litigation.
The law likewise steps into defining a legitimate business interest by noting that the "totality of the facts and circumstances" need to be considered. Relevant factors in this analysis include but are not limited to: the employee's exposure to the employer's customer relationships; exposure to other employees; near-permanence of customer relationships; the employee's acquisition, use, or knowledge of confidential information; temporal and geography restrictions; and the scope of activity restrictions. No factor carries more weight than the other and importance depends on the "facts and circumstances of the individual case." However, the law preserves judicial discretion noting that "[s]uch factors are only non-conclusive aids in determining the employer's legitimate business interest" and only "one component in the 3-prong rule of reason, grounded in the totality of the circumstances."
The law goes on to note explicitly, something that has always been the case but is stark to see written into law, that "[t]he same identical contract and restraint may be reasonable and valid under one set of circumstances and unreasonable and invalid under another set of circumstances."
The new law also imposes a requirement that employees are informed of their right to consult with an attorney and have at least 14 days to consider the agreement (either prior to employment or after the agreement is provided). However, employees may sign earlier if they desire. This provision alone will necessitate the redrafting of nearly every existing employer template agreement.
The law also imposes new fee shifting requirements when employers attempt to enforce an agreement but the employee prevails. In such cases, employees are entitled to costs, reasonable attorney's fees and other damages as determined by the court. Such provisions already exist in many of these agreements but are in some instances only applicable to the employee, whereas this provision would end such a one-sided application.
The law also codifies the use of blue-penciling by the courts in enforcing Illinois non-competes and non-solicits. While the law allows judge's discretion from "wholly rewriting contracts," it provides courts discretion to "reform or sever provisions" after consideration of certain factors including: fairness of the restricts as originally drafted; whether the original restrictions reflect 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 modification in their agreement.
The Act is clear that a number of related agreements do not constitute non-compete agreements. These include covenants covering: 1) non-solicitation (which are otherwise defined in the law); 2) confidentiality; 3) non-disclosure or use of trade secrets and confidential information; 4) invention assignment; and 5) reapplication of employment. The law likewise protects restrictions entered into in relation to the purchase or sale of a business or ownership interest, and provisions proving employee restrictions in relation to agreements between employers and employees which require advanced notice of termination where an employee remains employed and continues to receive compensation (which would seem to include garden leaves).
Interestingly, the definition of non-solicitations related to customers, vendors, etc. explicitly includes prospects, but the portion related to employee solicitation does not on its face cover former employees. Given the way many employers draft these agreements and other related terms around employee solicitation, this could become the subject of further litigation.
Attorney General Enforcement
Finally, the law provides the Illinois Attorney General's office with the power to investigate and prosecute companies it has reason to believe engaged in a pattern and practice prohibited by the law. The investigative powers include the ability to obtain sworn statements, testimony and subpoena records. If the Attorney General's office successfully prosecutes claims under this Act, they can obtain injunctive relief, monetary damages and civil monetary penalties of up to $10,000 per violation ($5,000 for first offenses).
Employers need to reevaluate their use of restrictive covenants. They should consider whether it makes sense to implement new agreements before the January 1, 2022 deadline. Once the deadline passes, employers should also consider which employees they request enter such agreements, the language included and the consideration offered in exchange.
For more information on how the new amendments to the Illinois Freedom to Work Act may impact your business, please contact your local Quarles & Brady attorney or:
- Brian Hartstein: (312) 715-5211 / [email protected]