Governor Pritzker signs Illinois Freedom to Work Act
On August 13th, Governor J.B. Pritzker signed into law important amendments to the Illinois Freedom to Work Act (the "Act"), which passed unanimously in the legislature in May. The amendments, which take effect on January 1, 2022, will significantly change the landscape of restrictive covenant law in Illinois. Most significantly for employers, the amendments greatly limit the types of employees who may be subject to covenants not to compete or solicit, impose employee-friendly procedural requirements and codify what may constitute adequate consideration for post-employment restrictions. While the amendments are not retroactively applicable to agreements signed before January 1, 2022, all Illinois employers must reassess their use of non-compete and non-solicitation agreements going forward.
Limitations on Covenants Not to Compete and Not to Solicit
The amendments to the Act prohibit Illinois employers from entering into non-compete and non-solicitation provisions with employees whose annual earnings (which includes all forms of taxable compensation) are below certain thresholds. In particular:
The Act also prohibits employers from entering into non-compete and non-solicitation agreements with other broad categories of employees, including: employees terminated or laid off because of COVID-19 or similar pandemics (unless the employer provides sufficient compensation, as defined in the Act), employees in the construction industry and employees governed by collective bargaining agreements under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act.
Notice and Procedural Protections for Employees
The new amendments additionally impose employee-friendly notice requirements on employers. Specifically, the Act provides that covenants not to compete or solicit are illegal and void unless the employer:
Enforceability of Covenants Not to Compete and Not to Solicit
In addition to the limitations noted above, the amendments to the Act provide additional clarity around when non-compete and non-solicitation provisions can be enforced. Under the statute, covenants not to compete or solicit will not be enforceable unless:
The amendments provide limited guidance on what constitutes adequate consideration, in part codifying the 2014 Fifield decision, which limited the extent to which mere continued employment can constitute consideration. The statute defines "adequate consideration" as the employee working for at least 2 years after the employee executes the agreement or the employer otherwise providing sufficient consideration which "can consist of a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves." The Act does not, however, specifically identify a dollar value that would make any such benefits "adequate" – either in conjunction with employment or by itself.
The Act additionally provides that "in determining the legitimate business interest of the employer, the totality of the facts and circumstances of the individual case shall be considered." Factors considered will include the specific employee's role and the nature and scope of the restrictions.
What is Not Changing
Notably, the Act does not completely change the landscape for all restrictive covenants in Illinois. The amendments specifically state that the requirements noted above do not apply to the following: confidentiality agreements or covenants, provisions prohibiting the use or disclosure of trade secrets or inventions, provisions governing invention assignment, agreements entered into in connection with the purchase or sale of a business or ownership interest, no-rehire provisions, or agreements where there is advance notice of termination, such that the employee remains employed by the employer and continues to receive compensation.
Consequences of Non-Compliance
Employers' consequences for failing to comply with the Act can be significant. While the amendments specifically permit blue-penciling – or court modifications to restrictive covenants in order to make them enforceable – failure to comply with the explicit requirements set forth above will cause such non-compete and non-solicitation provisions to be void and unenforceable as a matter of law. In addition, the amendments provide that employees who are successful in enforcement actions brought by their employers (including in arbitrations or by way of counterclaim) are entitled to costs, attorneys' fees and any additional "appropriate relief."
In addition, the Act grants the Illinois Attorney General with various enforcement mechanisms, which can result in significant financial consequences for employers. In particular, the Act grants the Attorney General the right to investigate and prosecute employer non-compliance with the Act's restrictions. Employers found to be out of compliance may be subject to monetary damages and substantial penalties ($5,000 per violation or $10,000 per each repeat violation).
Next Steps For Employers
As a result of the amendments to the Act, Illinois employers who require employees to enter into non-compete or non-solicitation covenants should begin preparing for the changes going into effect next year. In particular, employers should review template agreements and internal processes (i.e., who is asked to sign non-compete/non-solicitation covenants and when such agreements are distributed) and modify them to ensure compliance with the above requirements.
The 14-day review period for employees could significantly disrupt the onboarding process for many Illinois employees. As a result of these new restrictions, employers should also consider which positions actually require non-compete and non-solicitation protections, and ensure that individuals in those positions meet the Act's minimum annual earning thresholds. If they do not, employers may consider increases to annual earnings, which can come in the form of 401k contributions or other taxable fringe benefits.
As noted above, the Act does not specify a dollar value for adequate consideration, which will likely be an issue that will continue to be litigated in the coming years. Nonetheless, employers should assess what consideration they are offering in exchange for non-compete and non-solicitation covenants, beyond continued employment, and make sure that it is commensurate with the employee's position and the employer's business needs.
If you have any specific questions about the recent amendments, restrictive covenants, or any other employment-related questions, please contact a Goldberg Kohn Labor and Employment attorney.
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