What’s scarier than Halloween? For Illinois employers, it could be that they now have only approximately two months to prepare for Illinois’ new limits on employee restrictive covenants. On August 13, 2021, Illinois Governor Pritzker signed Senate Bill (SB) 672 (now Public Act 102-0358) into law, imposing new conditions on employers’ use of noncompete agreements and nonsolicitation agreements in Illinois. The law goes into effect on January 1, 2022, with Illinois joining the tide of states (as well as the federal government–see our blog on President Biden’s recent Executive Order addressing restrictive covenants here) cracking down on employers’ use of restrictive covenants.
Here’s what Illinois employers need to know now.
Employers have a couple of months to prepare–and don’t need to look back at prior agreements
The Act is effective for any contract entered into after January 1, 2022, and does not apply retroactively. Therefore, employers will not be required to inventory and assess agreements signed prior to the Act’s effective date.
Noncompete agreements banned for employees making $75,000 per year or less
The Act does not ban noncompetes for all Illinois employees, but instead for those making $75,000 per year in earnings or less. This salary threshold will increase by $5,000 every five years until it reaches $90,000 in 2037.
“Earnings” includes what employers might expect: earned salary, earned bonuses, earned commissions, or any other form of compensation reported on an employee’s IRS Form W-2.
Nonsolicitation agreements banned for employees making $45,000 per year or less
Customer, co-worker, and vendor nonsolicitation agreements are banned for employees making $45,000 in earnings per year or less. Similar to the salary threshold for noncompetes, the salary threshold for nonsolicits will increase–but only by $2,500–every five years until it reaches $52,500 in 2037.
Noncompetes / nonsolicits banned for employees downsized because of COVID-19
The Act prohibits companies from entering into noncompetes and nonsolicits with employees who were terminated, furloughed or laid off as a result of either business circumstances or governmental orders arising out of the COVID-19 pandemic (or circumstances similar to the pandemic). However, there is an exception, which permits enforcement of a noncompete if the employee receives additional compensation equal to the employee’s base salary at the time of termination for the period of enforcement minus compensation earned by the employee through subsequent employment during the enforcement period. There is no similar exception included in the Act for nonsolicitation agreements.
Excludes certain agreements from the definition of “covenants not to compete”
The Act excludes the following agreements from the definition of “covenants not to compete,” meaning they are not restricted–leaving room for employers to quell competition and protect confidential or trade secret information through these means:
- confidentiality agreements;
- trade-secret and invention-assignment agreements;
- agreements entered into in connection with the acquisition or disposition of an ownership interest in a business;
- “garden-leave clauses” (i.e. agreements “requiring advance notice of termination of employment, during which notice period the employee remains employed by the employer and receives compensation”); and
- “no-reapplication clauses” (i.e. agreements that “the employee agrees not to reapply for employment to the same employer after termination”).
The Act also specifically excludes nonsolicitation agreements (any agreement that bans solicitation of customers, prospective customers, employees, and vendors, among other categories) from the definition of “covenants not to compete.” But nonsolicits are subject to the salary threshold discussed above.
Requires employers to provide time for review and to advise attorney consultation
Employers must provide an employee at least 14 calendar days to review a noncompete or nonsolicitation agreement before signing, and must advise employees in writing to consult with an attorney before signing the agreement. However, the employer will still be in compliance even if the employee voluntarily elects to sign the agreement before the 14-day notice and review period has expired.
Defines meaning of “adequate consideration”–though it’s still unclear
Though the Act defines the “adequate consideration” needed in order for a restrictive covenant to be enforceable (materially codifying the rule set forth in Fifield v. Premier Dealer Services, 2013 IL App (1st) 120327), it raises almost as many questions as it answers. Under the Act, adequate consideration is either:
- (a) two years of continuous employment after signing the agreement; or
- (b) alternative consideration, which “can consist of a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.”
Though it is clear that an employee’s continuous employment for two years is adequate consideration, the definition of “alternative consideration” is broad, subjective, and muddled as to what “other” consideration will pass muster. Employers will have to await case law or additional legislation for clarity.
Defines “legitimate business interest”
The Act adopts the rule set forth in Reliable Fire Equipment Co. v. Arredondo, 965 N.E.2d 393 (Ill. 2011) that the “legitimate business interest of the employer” is a totality-of-circumstances test that should evaluate factors such as scope of restrictions and “the employee’s exposure to the employer’s customer relationships.”
The scope of prohibited agreements remains unclear
The Act is also notable for what it does not say. Specifically, the Act does not include any language limiting the definition of noncompetes or nonsolicits to agreements that prohibit post-employment, rather than during-employment, conduct. Nor does the Act address whether noncompetes or nonsolicits entered into as part of a severance agreement fall within the ambit of the law.
It is unclear whether these omissions were merely drafting oversights, or an intentional decision by the legislature to include during-employment and severance agreements within the Act’s scope. Other jurisdictions that have recently enacted noncompete laws have addressed these issues head on. For example, Massachusetts’ noncompete law limits the definition of noncompetes to those that prohibit competitive activities after the employment relationship ends. Massachusetts also excludes severance agreements from its definition of noncompetes. The District of Columbia took the opposite approach, and expressly banned during-employment noncompetes. Unless the Illinois legislature provides some clarity on these issues, during-employment and severance agreements that include noncompetes and nonsolicits arguably must meet the same income thresholds and other requirements that apply to traditional post-employment agreements.
Provides for methods of enforcement–including attorneys’ fees for employees if employers don’t prevail
The Act has enforcement provisions favoring both employees and employers. For employees, the Act authorizes an employee to recover attorneys’ fees and costs if the employee prevails in a lawsuit brought by the employer seeking to enforce a noncompete or nonsolicitation agreement. The Act also authorizes the Illinois attorney general to initiate or intervene in litigation and initiate investigations of potential violations.
For employers, the Act allows courts to reform noncompete and nonsolicitation agreements instead of only holding them unenforceable.
Key employer takeaways
What should Illinois employers do now to prepare? Companies with employees in Illinois should take these steps now to ensure they are in compliance come the January 1, 2022 effective date:
- Review and inventory existing “form” employee agreements containing restrictive covenants, and assess whether any updates are necessary for positions that do not meet the salary threshold. Forms should be updated now so they are ready for use on January 1, 2022. Consider using reciprocal notice periods before termination of employment. For example, if a post-employment non-compete may not be enforceable for lack of consideration under the new statute, courts may prevent an employee from competing during a reasonable notice period (assuming the employee satisfies the minimum earnings threshold).
- Train HR to ensure that policies and procedures regarding the presentation of employment offers and restrictive covenants for Illinois based employees are in compliance with the new law.
- Limit the extraterritorial scope of the new law. Many Illinois companies have used Illinois law to govern agreements for employees working in other states and in other countries. Consider using a more employer-friendly approach to governing law provisions to prevent the inadvertent application of Illinois law and to leverage the stronger protections available under local law.
- Amend compensation approaches / packages and on- and off-boarding procedures to allow for maximum protection of the company’s confidential information and trade secrets, and to curb unlawful competition. Use “golden handcuff” retention-based compensation structures to discourage the attrition of key employees.
- Review pandemic-related reduction in force policies and practices to ensure that nonsolicitation agreements are not used for downsized employees and, if noncompetes are used, they meet the statutory exception with respect to pay.
- Finally, consider implementing other viable strategies to suppress unlawful competition and protect confidential and trade secret information, including utilizing agreements expressly excluded from the definition of “covenants not to compete” (such as confidentiality agreements, trade secret agreements and invention-assignment agreements), as well as choice of law and exclusive venue provisions.
For assistance with this and your other employment needs, contact your Baker McKenzie employment attorney.