Alert: New Illinois Amendment Significantly Limits Use of Restrictive Covenants

Posted By Madilyn Moeller, Monday, July 19, 2021

woman reviews a non-solicitation agreement

By Renee E. Coover, JD, ByrdAdatto

Update October 26: On August 13, 2021, Illinois enacted a new law, amending the Illinois Freedom to Work Act (the "Act") to limit the enforceability of non-competition and non-solicitation agreements between employers and employees in Illinois. The restrictions apply only to contracts entered into on or after January 1, 2022.

As expected, the amended act introduces several new constraints on covenants not to compete in the workplace.

It also provides, as an additional remedy, that if an employee prevails on a claim to enforce a covenant not to compete or covenant not to solicit, the employee will recover all reasonable attorneys' fees and costs regarding such claim from the employer.

This new act follows on President Biden's Executive Order Promoting Competition in the America Economy from July 9, 2021, in which President Biden encouraged the Federal Trade Commission (FTC) to ban or limit non-compete agreements.

These groundbreaking amendments now make Illinois one of the most difficult states nationwide when it comes to enforcing covenants not to compete or solicit against employees. If you haven't done so already, now is the time for Illinois employers to review their existing non-compete and non-solicit agreements to ensure these agreements are enforceable pursuant to the amended Act.

Original Text: Following the lead of several other states and the Biden Administration, Illinois will make sweeping changes to its Freedom to Work Act ("Act") effective January 1, 2022, limiting employers' ability to restrict employees through covenants not to compete and covenants not to solicit.

The Act originally was enacted to prohibit employers from requiring low-wage employees to enter into non-competition agreements. But the new amendments to the Act prove to be even more employee-friendly by limiting which employees can be forced to enter into non-competition agreements and providing a minimum time for employees to review a non-competition agreement before being required to sign. Importantly, as the legislation is currently drafted, existing restrictive covenants would not be impacted by this law.

Specifically, some of the key aspects of the new amendments to the Act are:

  • It prohibits covenants not to compete for employees making less than $75,000 per year in earnings (including any commissions or bonuses). This threshold will increase over time (by $5,000 every five years) until the threshold becomes $90,000 in January 2037.
  • It prohibits customer non-solicitation agreements and employee non-solicitation agreements for employees making less than $45,000 per year in earnings. This threshold will increase in $2,500 increments every five years until it becomes $52,500 in January 2037.
  • It makes covenants not to compete or not to solicit void and illegal unless the employer provides employees 14 days to review an agreement containing a covenant not to compete or not to solicit, and advises the employee in writing to discuss the agreement with an attorney.
  • It codifies the "two-year rule" followed by certain Illinois state courts, requiring either two years of employment or alternative "adequate" consideration to make a non-compete or non-solicitation agreement enforceable.
  • It bans enforcement of covenants not to compete for employees who are terminated or furloughed because of COVID-19 or "circumstances that are similar to the COVID-19 pandemic" unless certain compensation is provided to the employee.
  • It mandates the recovery of attorneys' fees and costs by an employee who prevails in a lawsuit brought by the employer seeking to enforce a covenant not to compete or covenant not to solicit.

To prepare for the effective date of the legislation on January 1, 2022, Illinois employers should create new employment agreements that comply with the law for applicable future employees.
Although existing restrictive covenants will not be impacted by this new legislation, some interesting questions are still unanswered and will need to be clarified by regulation, such as whether existing restrictive covenants are grandfathered indefinitely or if new limitations will apply when the employment agreement is revised or automatically renewed. Thus, now is the time for all Illinois employers to review their existing non-compete and non-solicit agreements to ensure they provide adequate protection.

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Renee E. Coover, JD, is an associate with ByrdAdatto, a law firm focusing on business, healthcare, and aesthetics. She has a unique background, blending litigation with healthcare law. A former litigator in high-stakes employment cases, Renee has extensive experience with counseling and representing businesses in employment matters, policies, and contract disputes, and defending business owners in state and federal trials. She has also served as General Counsel for the American Med Spa Association, advising health care professionals on regulatory and legal issues governing the medical spa industry.

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