Illinois joins a growing list of jurisdictions, including California, District of Columbia, Maryland, Massachusetts, Oregon, Rhode Island, Virginia and the State of Washington, that have recently passed legislation limiting or outlawing restrictive employee non-competition and non-solicitation covenants. There is also a new push at the federal level to all but bar non-competition agreements, except under certain circumstances involving the sale of a business or dissolution of a partnership.
On August 13, 2021, Illinois Governor Pritzker signed into law a bill amending the Illinois Freedom to Work Act, which governs restrictive covenants and non-competition agreements. The amendments include certain limitations on the enforceability of non-compete agreements and contain severe penalties for employers who fail to comply with these regulations, which become effective on January 1, 2022, and will not apply retroactively. This legislation’s new limitations to non-compete agreements and potential penalties to employers include the following:
Salary Thresholds for Restrictive Covenants:
- The Bill prohibits non-competition agreements with employees earning $75,000 or less.
- It also prohibits non-solicitation covenants with employees earning $45,000 or less.
- These annualized earning thresholds increase periodically beginning in 2027.
Consideration Requirements for Non-Competition Agreements permitted under the legislation:
- The legislation codifies the two-year Fifield consideration rule, first established in Fifield v. Premier Dealer Services, Inc., which held that continued employment is not sufficient consideration for a restrictive covenant unless the employee remains employed for at least two years.
- Under the new legislation, a restrictive covenant is supported by “adequate consideration” if (1) the employee worked for the employer for at least two years after signing a restrictive covenant agreement (i.e. satisfies the Fifield rule), or (2) the employer otherwise provided consideration adequate to support the restrictive covenant agreement, “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 legislation does not provide additional guidance on what “professional or financial benefits” are sufficient to be considered adequate consideration.
- In addition to the consideration requirements, the legislation also requires employers to advise the employee in writing to consult with an attorney before entering into the agreement and to provide the employee at least 14 calendar days to review the agreement before signing it.
Potential Penalties to Employers for Non-Compliance:
- The legislation creates mandatory attorneys’ fees rights for an employee who prevails against an employer unsuccessfully attempting to enforce noncompliant restrictive covenants.
- Authorizes the Illinois Attorney General to investigate any patterns and practices that violate the legislation. The Illinois Attorney General may impose a civil penalty of $5,000 per violation or $10,000 for each repeat violation within a 5-year period.
These new regulations will not apply retroactively to existing and executed restrictive covenant agreements. However, Illinois employers will want to carefully revisit their non-compete and non-solicitation agreements in light of these new forthcoming regulations to ensure that future restrictive covenant agreements will be enforceable. In doing so employers should also be mindful that while the law codifies the “blue pencil” doctrine, which permits the reformation of restrictive covenants by the court, the law also places the decision on whether reformation is appropriate within the judgment of the court based on several somewhat vague statutory factors.
This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This alert is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. We are working diligently to remain well informed and up to date on information and advisements as they become available. As such, please reach out to us if you need help addressing any of the issues discussed in this alert, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.
Unless expressly provided, this alert does not constitute written tax advice as described in 31 C.F.R. §10, et seq. and is not intended or written by us to be used and/or relied on as written tax advice for any purpose including, without limitation, the marketing of any transaction addressed herein. Any U.S. federal tax advice rendered by DarrowEverett LLP shall be conspicuously labeled as such, shall include a discussion of all relevant facts and circumstances, as well as of any representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) upon which we rely, applicable to transactions discussed therein in compliance with 31 C.F.R. §10.37, shall relate the applicable law and authorities to the facts, and shall set forth any applicable limits on the use of such advice.