What is the New Illinois Non-Compete Law?

On August 13, 2021, Governor Pritzker signed the Illinois Freedom to Work Act (the "Act") into law, which became effective on January 1, 2022, and applies to non-competition and non-solicitation agreements entered into after the effective date.  The Act codifies Illinois law on non-competition and non-solicitation agreements.  In so doing, the Act establishes a set of statutory requirements and express prohibitions, with which Illinois employers should immediately familiarize themselves.  The Act is distilled and outlined below.

I. Statutory Requirements

The Act provides that a covenant not to compete or a covenant not to solicit is illegal and void unless:

1. The employee receives adequate consideration in exchange for the covenant;

2. The covenant is ancillary to a valid employment relationship;

3. The covenant is no greater than required for the protection of a legitimate business interest of the employer;

4. The covenant does not impose an undue hardship on the employee; and

5. The covenant is not injurious to the public.

Here the Act codifies the Illinois Supreme Court's decision in Reliable Fire Equipment Company v. Arredondo, 965 N.E.2d 393 (Ill. 2011), which harmonized Illinois common law on the enforceability of non-competition agreements.

II. Adequate Consideration

The Act provides that adequate consideration to support a non-competition or non-solicitation agreement means:

1. The employee worked for the employer for at least two years after the employee signed the agreement; or

2. The employer otherwise provided consideration adequate to support the agreement, which consideration may consist of: (a) a period of employment plus additional professional or financial benefits, or (b) professional or financial benefits adequate by themselves.

Here the Act codifies and clarifies the Illinois Appellate Court's decision in Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327, which established the controversial "two-year rule."

It should be noted that 'professional or financial benefits,' which the Act does not delineate, may include a whole host of benefits, such as a bonus, raise, promotion, and various incentive compensation and stock options.

III. Legitimate Business Interest

The Act provides that in determining the legitimate business interest of an employer, the "totality of the facts and circumstances of the individual case shall be considered."  Non-exclusive factors of the analysis include (a) the employee's exposure to the employer's customer relationships or other employees, (b) the near-permanence of the employer's customer relationships, (c) the employee's acquisition, use, or knowledge of the employer's confidential information through the employee's employment, as well as the reasonableness of the scope of the temporal, geographic, and activity restrictions.

Here the Act again codifies Reliable Fire.

IV. New Additional Statutory Notice Requirements

The Act provides that a covenant not to compete or a covenant not to solicit is illegal and void unless:

1. The employer advises the employee in writing to consult with an attorney before entering into the covenant; and

2. The employer (a) provides the employee with a copy of the agreement at least 14 calendar days before the start of the employee's employment, or (b) provides the employee with at least 14 calendar days to review the agreement.

These are new mandatory express statutory requirements that did not exist under Illinois common law.

V. Express Prohibitions

A. Compensation Thresholds

1. Non-Compete Covenants. The Act prohibits employers from entering into a covenant not to compete with any employee unless his or her actual or expected annualized rate of earnings exceeds $75,000 per year.  The Act provides that a covenant not to compete entered into in violation of this prohibition is void and unenforceable.

2. Non-Solicitation Covenants. The Act prohibits employers from entering into a covenant not to solicit with any employee unless his or her actual or expected annualized rate of earnings exceeds $45,000 per year.  The Act provides that a covenant not to solicit entered into in violation of this prohibition is void and unenforceable.

B. COVID-19-Related Terminations

The Act prohibits covenants not to compete and covenants not to solicit with respect to any employee who an employer terminates, furloughs, or lays off as a 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 the employee his or her base salary for the restricted period, subject to mitigation from other employment.  The Act provides that a covenant not to compete or a covenant not to solicit entered into in violation of this prohibition is void and unenforceable.

C.  Construction Workers and Public Employees

The Act provides that a covenant not to compete is void and illegal with respect to individuals employed in construction (subject to certain exceptions) as well as individuals covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act.

These express statutory prohibitions did not exist under Illinois common law.

VI. Exemptions

1. Confidentiality and Non-Disclosure Agreements

Significantly, the Act provides that a covenant not to compete does not include confidentiality agreements, agreements prohibiting the use or disclosure of trade secrets or inventions, or invention assignment agreements.

2. Purchase or Sale of Business

The Act provides that a covenant not to compete does not include agreements or covenants entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest.

3. Garden Leave

The Act provides that a covenant not to compete does not include agreements between an employer and employee requiring advance notice of termination of employment, during which notice period the employee remains employed and receives compensation.

4. No Reemployment Clauses

The Act provides that a covenant not to compete does not include agreements in which an employee agrees not to reapply for employment with the employer after termination.

VII. Blue Penciling

With respect to judicial reformation or "blue penciling" of covenants not to compete or not to solicit, the Act states that "Extensive judicial reformation of a covenant not to compete or a covenant not to solicit may be against the public policy of this State and a court may refrain from wholly rewriting contracts."

The Act also provides that in some circumstances, blue penciling may be permissible, in a court's discretion.  Factors include the fairness of the restraints as originally written, whether the original restriction reflects a good-faith effort to protect a legitimate business interest, the extent of any reformation, and whether the subject agreement contains a blue penciling clause.

Here the Act attempts to clarify Illinois common law on blue penciling, and states that blue penciling may violate public policy.

VIII. Attorneys' Fees

Of great significance, the Act contains a fee shifting provision that provides that if an employee prevails on a claim to enforce a covenant not to compete or a covenant not to solicit, the employee shall recover from the employer all costs and reasonable attorneys' fees incurred in the enforcement litigation.

This unilateral fee shifting did not exist under Illinois common law, and is statutory creation that may temper employers' appetite to file enforcement actions against former employees.

Employers should promptly revise their employment agreements and restrictive covenants to comply with and conform to the requirements and prohibitions of the Act.