Reminder: 2022 Updates to the Illinois Freedom to Work Act Impact Restrictive Covenants
September 21, 2022
Originally published on June 16, 2021 and updated on September 21, 2022.
Non-competes and non-solicits, so-called restrictive covenants, have been at the center of a nationwide discussion for many years. On the one hand, employee-leaning constituencies have advocated for substantial restrictions and/or outlawing restrictive covenants. Employer groups, on the other hand, have argued that restrictive covenants are necessary to protect important business interests, such as mitigating the risk of unfair competition. The debate has raged on for years now, and many states have enacted legislation regulating restrictive covenants.
Illinois has now jumped back into the fray, as Governor Pritzker, on August 13, 2021, signed into law an amendment to The Illinois Freedom to Work Act (the “Amended Act”). The Amended Act ushers in a new era of restrictive covenant regulation effective January 1, 2022.
Employers should consider this change to Illinois law. Below is a discussion of key points.
The Amended Act addresses the use of non-competes and non-solicits, both of which are defined in the proposed legislation. Critically, both categories are limited to those “entered into after the effective date of this Amendatory Act of the 102nd General Assembly.” This means the Amended Act will apply prospectively and its application will be limited to employment agreements signed after January 1, 2022.
Throughout the nation, there is a growing view that lower-paid employees should not be saddled with the burden of post-employment restrictive covenants. The Amended Act joins this movement by prohibiting non-competes, initially, with respect to any employee not earning more than $75,000 and prohibiting non-solicits, initially, with respect to any employee not earning more than $45,000. These thresholds will increase every five years until 2037:
(a) No employer shall enter into a covenant not to compete with any employee unless the employee’s actual or expected annualized rate of earnings exceeds $75,000 per year. This amount shall increase to $80,000 per year beginning on January 1, 2027, $85,000 per year beginning on January 1, 2032, and $90,000 per year beginning on January 1, 2037. A covenant not to compete entered into in violation of this subsection is void and unenforceable. [Removed: No employer shall enter into a covenant not to compete with any low-wage employee of the employer.]
(b) No employer shall enter into a covenant not to solicit with any employee unless the employee’s actual or expected annualized rate of earnings exceeds $45,000 per year. This amount shall increase to $47,500 per year beginning on January 1, 2027, $50,000 per year beginning on January 1, 2032, and $52,500 per year beginning on January 1, 2037. A covenant not to solicit entered into in violation of this subsection is void and unenforceable. [Removed: A covenant not to compete entered into between an employer and a low-wage employee is illegal and void.]
Presumably, the Amended Act would be amended before or around 2037 to implement further adjustments to the compensation thresholds.
Defining Adequate Consideration
Illinois law has traditionally required “adequate consideration” to support enforcement of a non-compete or non-solicit covenant. Since Fifield v. Premier Dealer Services, Inc. was decided in 2013, there has been an active controversy over what actually constitutes “adequate consideration.” In Fifield, the First District determined that in the absence of other consideration, continued employment was adequate consideration only if the employee was employed for two full years following execution of the agreement containing the restrictive covenant at issue. That ruling was adopted by other courts in Illinois. But the federal courts largely rejected Fifield, believing that the Illinois Supreme Court would not, if provided an opportunity, adopt the Fifield rule.
The Amended Act resolves this disagreement by codifying the Fifield rule: “‘[a]dequate consideration’ means (1) the employee worked for the employer for at least 2 years after the employee signed an agreement containing a covenant not to compete or a covenant not to solicit …”
The Amended Act does not, however, limit “adequate consideration” to continued employment, but encompasses other undefined professional or financial benefits – “‘[a]dequate consideration’ means … (2) the employer otherwise provided consideration adequate to support an agreement to not compete or to not solicit, which consideration can consist of a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.”
The contours of this other consideration are nebulous at best. Nevertheless, if past legal disputes are predictive, other benefits are likely to include cash payments, special training, etc. What will no doubt be important is that the operative employment agreement is drafted to specifically describe other benefits as part of the employee’s consideration package so the employment agreement clearly reflects that the other benefits are given in return for the restrictive covenant.
Employees often sign an employment agreement in the days leading up to employment or on the employee’s first day of employment. Employers beware: employers will now be required to advise employees in writing to consult with an attorney before agreeing to a non-compete or non-solicit restrictive covenant and provide employees 14 days to review the covenant. Absent compliance, the covenant is “illegal and void”:
Ensuring employees are informed about their obligations. 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 provides the employee with a copy of the covenant at least 14 calendar days before the commencement of the employee’s employment or the employer provides the employee with at least 14 calendar days to review the covenant. An employer is in compliance with this Section even if the employee voluntarily elects to sign the covenant before the expiration of the 14-day period.
In the past, employers who pursued and lost lawsuits seeking to enforce restrictive covenants typically had no risk of paying the employee’s legal fees. Employers wisely did not draft employment agreements to provide an employee with such a right. The Amended Act changes the landscape, giving employees the statutory right to recover attorney’s fees if the employee “prevails” in a lawsuit seeking to enforce a non-compete or non-solicit:
Sec. 25. Remedies. In addition to any remedies available under any agreement between an employer and an employee or under any other statute, in a civil action or arbitration filed by an employer (including, but not limited to, a complaint or counterclaim), 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 all reasonable attorney’s fees regarding such claim to enforce a covenant not to compete or a covenant not to solicit, and the court or arbitrator may award appropriate relief.
In the Amended Act, the Illinois General Assembly empowers the Attorney General to investigate and take action against employers that violate Amended Act:
Sec. 30. Attorney General enforcement. (a) Whenever the Attorney General has reasonable cause to believe that any person or entity is engaged in a pattern and practice prohibited by this Act, the Attorney General may initiate or intervene in a civil action in the name of the People of the State in any appropriate court to obtain appropriate relief.
This is a fairly significant change, requiring reconsideration of aggressive drafting and enforcement of non-competes and non-solicits.
The Employment and Executive Compensation and Litigation Groups at Levenfeld Pearlstein will continue to monitor any developments on the amendments to the Illinois Freedom to Work Act. If you have any specific questions about the Act or its amendments, please do not hesitate to reach out.
This document is not intended to, nor shall it be considered legal advice. If you have any questions regarding your legal rights, you should address the specific matter with your attorney.