Over the Memorial Day weekend, the Illinois General Assembly unanimously passed amendments to the Illinois Freedom to Work Act, 820 ILCS 90/1 (“IFWA”). Governor Pritzker is expected to sign the IFWA into law in the coming months. The IFWA imposes new threshold burdens for determining the enforceability of non-competition and non-solicitation agreements entered into on or after January 1, 2022.
1. The IFWA Limits Who May Be Subject to Non-Compete and Non-Solicit Agreements.
The IFWA amendment makes non-compete agreements void and unenforceable for any employee earning $75,000 or less per year in 2022. This earnings threshold increases by $5,000 every five (5) years until it reaches $90,000 in 2037. Similarly, non-solicitation agreements are void and unenforceable for any employee earning $45,000 or less per year in 2022. This earnings threshold increases by $2,500 every five (5) years until it reaches $52,500 in 2037. “Earnings” is broadly defined to include any earned salary, bonuses, commissions, or any other form of taxable compensation, 401(k) or 403(b) plan contributions, FSA or HSA accounts, and commuter benefit-related deductions.
The IFWA amendment also expands the definition of “covenant not to compete” to include any agreement “that by its terms imposes adverse financial consequences” (e.g. forfeiture for competition provisions) on the former employee for engaging in competitive activities after termination. Thus, any agreement that requires forfeiture of a severance, garden pay, bonus, stock, equity or similar payment in the event an employee works for a competitor is subject to the requirements of the IFWA amendments even where the agreement does not prohibit the employee from working for a competitor.
Regardless of salary, covenants not to compete are void and illegal for individuals covered by a collective bargaining agreement and certain individuals employed in construction. Additionally, employers may not enter into restrictive covenants with employees who are terminated, furloughed, or laid off as a result of business circumstances or governmental orders related to a pandemic (e.g. COVID-19) unless the enforcement period includes payment of the employee’s base salary at the time of separation. Compensation provided under this circumstance can be offset by any subsequent compensation earned during the enforcement period.
2. Non-Compete and Non-Solicit Agreements Must Now Include a Specific Notice to be Enforceable.
Beginning in 2022, all non-compete and non-solicit agreements must include written notice that: (1) advises the employee to consult with an attorney prior to entering into the non-compete or non-solicit agreement; and (2) provides the employee at least fourteen (14) calendar days to review the agreement. The employee may elect voluntarily to sign the agreement before exhausting the fourteen (14) day period.
This is a new requirement and makes Illinois unique. There are very few states in which presentation of the agreement (and possibly even execution of the agreement) before employment begins is important. The hard fourteen-day notice period, however, is an Illinois innovation. For multi-state employers, complying with the Illinois notice rule globally (even outside of Illinois) would have some utility in assisting in enforcement elsewhere.
3. Non-Compete Consideration and Legitimate Business Interest Concepts are Clarified.
Under the IWFA amendment, a non-compete or non-solicit agreement also is void unless: (1) the employee receives adequate consideration; (2) the covenant is ancillary to a valid employment relationship; (3) the restriction is no greater than required to protect a legitimate interest of the employer; (4) it does not impose an undue hardship on the employee; and (5) it is not injurious to the public.
The amendment adopts two important aspects of Illinois law relating to an employer’s legitimate business interest and the “two-year” consideration standard. First, the amendment codifies a near identical standard first articulated in Reliable Fire Equipment Co. v. Arredondo, 965 N.E.2d 393 (Ill. 2011), which required courts to assess “the totality of the circumstances” when determining a legitimate business interest. As defined in the IFWA amendment, the totality of the circumstances includes an employee’s exposure to customer relationships, the acquisition, use, or knowledge of confidential information, and the time, place, and/or scope restrictions. No factor explicitly carries more weight and reasonableness must be gauged by a totality of the facts and circumstances of each individual case.
Second, the bill adopts and codifies the “two-year” consideration standard of Fifield v. Premier Dealer Services, Inc. 993 N.E.2d 938 (Ill. App. Ct. 2013). Adequate consideration includes: (1) the employee has worked for the employer for at least two (2) years; or (2) the employer otherwise provided consideration “adequate to support” a restrictive covenant. The second form of consideration can be any combination of employment plus “additional professional or financial benefits,” or just professional and/or financial benefits. However, the additional professional or financial benefits remain undefined and will be subject to development through litigation.
Illinois state and federal courts have had well-documented struggles with Fifield for years, and there were multiple cases challenging whether Fifield was good law or would be followed by the Illinois Supreme Court. Those struggles are largely resolved (at least going forward) by this amendment. Even before the amendment, it was a good practice to include some consideration – aside from employment alone – in support of a non-competition agreement. And, although most states do not require this, some global consideration aside from employment alone, now required in Illinois, has been a good practice everywhere (even where not required), in part because not all states enforce choice of law or forum selection clauses (especially in non-competition agreement cases). People move and it is impossible to predict in advance which state’s law will apply to an agreement years from now. This is even more true now following Illinois’ amendment.
Following Illinois common law principles, the bill provides reviewing courts with discretionary authority to reform or sever (i.e. “blue pencil”) a restrictive covenant that would otherwise be unenforceable. Such revision or severance must be balanced to include:
- The fairness of the restraints as originally written
- Whether the original agreement reflects a good-faith effort to protect a legitimate business interest
- The extent of reformation needed to cure
- Whether the parties included a clause authorizing such modification
5. Enforcement and Other Remedies.
The Illinois Attorney General may bring civil actions against any person or entity engaged in a pattern and practice prohibited under the Act. Courts may impose a civil penalty up to $5,000 for each violation or $10,000 for each repeat violation within a five (5) year period. Additionally, a prevailing employee in an enforcement challenge is explicitly permitted to collect costs and attorney’s fees.
These significant changes are not retroactive and will not apply to agreements entered into before January 1, 2022. Employers should review their existing restrictive covenants to revise as appropriate for compliance in 2022 and to ensure they provide adequate protection.