Illinois Employers: New Noncompete Law Effective Jan. 1, 2022

December 22, 2021 Advisory

Illinois employers looking forward to the start of the new year should be mindful of important changes to the noncompete law landscape. The changes go into effect on Jan. 1, 2022, pursuant to the recently enacted Freedom to Work Act (the Act). These changes include:

$75,000 Noncompete Threshold: Employers are prohibited from entering into a “covenant not to compete” with any employee unless the employee’s actual or expected annualized rate of earnings exceeds $75,000. This amount is increased to $80,000 beginning Jan. 1, 2027, $85,000 beginning Jan. 1, 2032, and $90,000 beginning Jan. 1, 2037. Any “covenant not to compete” entered into with an employee that does not meet the applicable earnings threshold at the time the employee signs the agreement is “void and unenforceable.”

The Act defines a “covenant not to compete” as a covenant that restricts an employee from performing “(1) any work for another employer for a specified period of time; (2) any work in a specified geographical area; or (3) work for another employer that is similar to employee’s work for the employer included as a party to the agreement.” A “covenant not to compete” also includes any agreement that “by its terms imposes adverse financial consequences on the former employee if the employee engages in competitive activities after the termination of the employee’s employment with the employer.”

$45,000 Nonsolicitation Threshold: Employers are prohibited from entering into a “covenant not to solicit” with any employee unless the employee’s actual or expected annualized rate of earnings exceeds $45,000. This amount is increased to $47,500 beginning Jan. 1, 2027, $50,000 beginning Jan. 1, 2032, and $52,500 beginning on Jan. 1, 2037. Any “covenant not to solicit” entered into with an employee that does not meet the applicable earnings threshold at the time the employee signs the agreement is “void and unenforceable.”

The Act defines a “covenant not to solicit” as any agreement that (1) restricts the employee from soliciting for employment the employer’s employees; or (2) restricts the employee from soliciting, for the purpose of selling products or services of any kind to, or from interfering with the employer’s relationships with, the employer’s clients, prospective clients, vendors, prospective vendors, suppliers, prospective suppliers or other business relationships.

Separations Resulting from the COVID-19 Pandemic: Employers are prohibited from entering into a covenant not to compete or a covenant not to solicit with any employee terminated, furloughed or laid off as the result of business circumstances or governmental orders related to the COVID-19 pandemic, or under circumstances that are similar to the COVID-19 pandemic, unless the employer pays compensation equivalent to the employee’s base salary at the time of termination for the period of enforcement (less any compensation the employee earns through subsequent employment during the period of enforcement).
Specific Prohibitions on Certain Types of Employees: The Act prohibits employers from entering into “covenants not to compete” with individuals (1) covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act; and (2) employed in construction, unless the construction employees perform “management, engineering or architectural, design, or sales functions for the employer or who are shareholders, partners, or owners in any capacity of the employer.”
Reasonableness Test: In addition to the monetary thresholds, the new law requires that a covenant not to compete or a covenant not to solicit satisfy the following conditions to be reasonable and enforceable: (1) the employee receives adequate consideration; (2) the covenant is ancillary to a valid employment relationship; (3) the covenant is no greater than is required for the protection of a legitimate business interest of the employer; (4) the covenant does not impose undue hardship on the employee; and (5) the covenant is not injurious to the public. These requirements largely codify prevailing Illinois case authority; however, the Act clarifies the extent to which consideration will be deemed “adequate.” See Reliable Fire Equip. Co. v. Arredondo, 2011 IL 111871, ¶ 17 (“A restrictive covenant, assuming it is ancillary to a valid employment relationship, is reasonable only if the covenant: (1) is no greater than is required for the protection of a legitimate business interest of the employer-promisee; (2) does not impose undue hardship on the employee-promisor, and (3) is not injurious to the public.”)

Importantly, the “adequate consideration” element is only met if (1) the employee works for the employer for at least two years after the employee signs an agreement containing a covenant not to compete or a covenant not to solicit; (2) the employer provides adequate consideration in the form of a period of employment plus additional professional or financial benefits; or (3) the employer provides professional or financial benefits adequate by themselves.

Notice Requirement: For a covenant not to compete or covenant not to solicit to be enforceable, an employer must (1) advise the employee in writing to consult with an attorney before entering into the covenant; and (2) provide the employee with at least 14 calendar days to review the covenant. An employee may voluntarily elect to sign the covenant before the expiration of the 14-day period.
Employee Remedies: If an employee prevails on a claim to enforce a covenant not to compete or a covenant not to solicit in a civil action or arbitration filed by an employer, the employee is entitled to collect from the employer all costs and all reasonable attorney’s fees regarding such claim to enforce a covenant not to compete or a covenant not to solicit. The Act also authorizes the Illinois Attorney General to initiate or intervene in a civil action to obtain “appropriate relief.”
Judicial Reformation: The Act acknowledges that “[e]xtensive judicial reformation of a covenant not to compete or a covenant not to solicit may be against” Illinois public policy, and courts may refrain from “wholly rewriting contracts.” However, the Act confirms an Illinois court’s discretion to “reform or sever provisions of a covenant not to compete or a covenant not to solicit rather than hold such covenant unenforceable,” and identifies the following factors for courts to consider when deciding whether reformation is appropriate: (1) the fairness of the restraints as originally written; (2) whether the original restriction reflects a good-faith effort to protect a legitimate business interest of the employer; (3) the extent of such reformation; and (4) whether the parties included a clause authorizing such modifications in their agreement.

Employers should carefully consider these changes in the law and take immediate steps to ensure that employee noncompete and nonsolicitation covenants entered into on or after Jan. 1, 2022, are consistent with the above requirements. If you have any questions specific to your organization, please contact your regular Armstrong Teasdale attorney or one of the authors listed below.