Illinois employers should take notice of the amendment to the Illinois Freedom to Work Act (the Act) that Democratic Gov. J.B. Pritzker signed into law on August 13, 2021. The amendment, which takes effect on January 1, 2022, dramatically alters the landscape of noncompetition and nonsolicitation agreements in Illinois. Employers that require employees to sign such agreements should carefully review the substance and procedures of their agreements — or face the prospect that the agreements may be unenforceable and may expose employers to significant monetary penalties.
As detailed below, the newly amended Freedom to Work Act limits which employees may be subjected to noncompetition and nonsolicitation requirements, implements additional procedural requirements, provides additional clarity regarding what factors must be met to create an enforceable restrictive covenant agreement with an eligible employee, and provides for additional employee remedies and enforcement from the Attorney General.
Employees Eligible for Noncompete and Nonsolicit Covenant Agreements
Previously, the Act prohibited noncompetition covenants with workers earning less than $13 per hour or the hourly minimum wage, whichever was greater. As amended, the Act now prohibits noncompetes with employees earning $75,000 or less and nonsolicitation covenants (to which the Act previously didn’t apply at all) with employees earning less than $45,000 annually, with each earnings figure set to increase periodically beginning in 2027. The Act expressly does not apply to other types of restrictive covenants, including those regarding confidentiality, nondisclosure, and assignment of inventions, as well as covenants made in connection with the sale of a business, garden-leave clauses, and no-reapplication clauses.
Additionally, the Act provides protections for employees terminated, furloughed, or laid off due to COVID-19 or similar circumstances, including prohibiting employers from entering into noncompetes or nonsolicits with such employees unless the agreement includes compensation equivalent to the employee’s base salary at the time of termination for the period the noncompetition restriction is enforced, less any compensation the employee earns through subsequent employment through the period of enforcement.
Planning for Enforceable Covenants: Adequate Consideration, Legitimate Business Interests, and Procedural Requirements
The Act outlines specific criteria employers must meet when forming an agreement with noncompetition and nonsolicitation provisions. In particular, the Act states that covenants are illegal and void unless they are supported by “adequate consideration” and are “no greater than is required for the protection of a legitimate business interest of the employer.”1
- Adequate Consideration. Codifying an unusual bit of Illinois common law, if the sole consideration provided for the noncompete or nonsolicit is at-will employment, such consideration is adequate only if the employee works for the employer for at least two years after agreeing to the restrictive covenant. Otherwise, at-will employment is not adequate consideration by itself, and the employer must provide some other type of consideration (e.g., a bonus or promotion) to support the restrictive covenant.
- Legitimate Business Interest. The Act codifies another piece of Illinois common law by instructing courts to consider the totality of the circumstances in determining whether a covenant protects a legitimate business interest. After listing numerous factors to be considered — which generally track factors courts in Illinois often analyzed already — the Act makes clear that no single factor is determinative and that such factors should be considered on a case-by-case basis. Employers should not assume a court will curtail (i.e., blue-pencil) significantly overbroad covenants, either: “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.”
In addition, the Act creates certain procedural protections for employees by requiring employers to (1) advise employees in writing to consult with an attorney prior to entering into the restrictive covenant and (2) provide the employee with at least 14 days to review the covenant before signing (which can be prior to the start of employment).
Penalties for Failure to Comply With the Act
The amendment also gives the Freedom to Work Act sharp new teeth. First, it creates mandatory attorney’s fees rights for an employee who prevails against her (likely former) employer when the employer files a civil action or arbitration to enforce a noncompetition or nonsolicitation agreement. Second, when an employer engages in a pattern or practice prohibited by the Act, the Illinois Attorney General is now authorized to investigate the employer or to initiate or intervene in a civil action to “obtain appropriate relief.” Remedies may include monetary damages to the state, restitution, equitable relief, and civil penalties not to exceed $5,000 for each violation or $10,000 for each repeat violation within a five-year period.
Enforcement of agreements not to compete and not to solicit has always been subject to a fact-specific inquiry, and the Freedom to Work Act, as amended, continues the trend of requiring such analysis. But as of January 1, 2022, the Act now includes multiple hurdles that previously did not exist (or were enforced only in some courts) — each of which can render a noncompete or nonsolicit wholly unenforceable for an employer that trips over them. In response to this amendment, employers should ensure, prior to the end of this year, that their restrictive covenant agreements comply with the Act, that they are providing such agreements only to employees permitted by the Act, and that their recruitment and onboarding processes are prepared to meet the law’s new demands.
Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.
Attorney Advertising—Sidley Austin LLP, One South Dearborn, Chicago, IL 60603. +1 312 853 7000. Sidley and Sidley Austin refer to Sidley Austin LLP and affiliated partnerships, as explained at www.sidley.com/disclaimer.
© Sidley Austin LLP