Patricia L. Jochum is an attorney at Favaro & Gorman, LTD.
The Illinois Freedom to Work Act (820 ILCS §90) prohibits Illinois employers from requiring “low wage employees” to enter into non-competition agreements which prevent the employee from working for another employer for a specified period of time, working in a specific geographic area or doing work for another employer similar to the employee’s work for the employer declaring such agreements “illegal and void”. An employer typically requires this type of agreement to protect its business interests.
On August 13, 2021, Governor Pritzker signed into law Public Act #102-0358 which amends The Illinois Freedom to Work Act. It will become effective on January 1, 2022. The amendments expand the Act’s application, the number of employees to which it applies, includes new definitions, and authorizes Illinois Attorney General involvement.
The Amendments provide that a covenant not to compete will now be defined as an agreement entered after January 1, 2022 that imposes an adverse financial consequence on a former employee if the employee engages in competitive activities after termination. A covenant not to compete does not include covenants not to solicit, confidentiality agreements, the purchasing or selling of the goodwill of a business, clauses requiring advance notice of termination, and prohibitions against the use or disclosure of trade secrets or inventions.
Covenants not to compete will be held illegal and void if the employee is subject to a collective bargaining agreement under the Illinois Public Relations Act or the Illinois Educational Labor Relations Act or is in the construction industry with exceptions primarily related to management, engineering, architectural, design or sales functions or certain roles such as shareholders, partners, or owners in any capacity.
The amended Act will eliminate the term “low wage employee” and replace it with an expanded definition which includes all employees (with limited exceptions) with earnings up to a defined amount which will increase incrementally over the next fifteen years. The defined earnings amount and dates on which they increase relative to non-competition agreements will be as follows: January 1, 2022-$75, 000.00; 2027-$80, 000.00; 2032-$85, 000.00; and 2037-$90, 000.00. Earnings include salary, earned bonus, earned commission and other forms of taxable income reportable on a W-2 including amounts contributed to benefits in addition to elected deferrals not reflected on a W-2 such as contributions to health savings accounts.
Furthermore, the Act will now also be applicable to non-solicitation agreements which are defined as a restriction on an employee from soliciting other employees for employment or for the purpose of selling products or services or interfering with the employer’s actual or perspective clients, vendors, suppliers, or other business relationships.
The applicable employee earnings cap is different for non-solicitation agreements than non-competition agreements, but it will also increase incrementally over the next fifteen years. The amounts and years in which increases will occur are: January 1, 2022-$45, 000.00, 2027-$47, 000.00, 2032-$50, 000.00 and 2037-$52, 500.00.
Employers should note that covenants not to compete or solicit will be illegal and void unless the employee is advised in writing: 1) to consult with an attorney; 2) the employer provides the employee with a copy of the restrictive covenant 14 calendar days before commencement of employment; or 3) provides the employee 14 days to review it. The employer will be compliant even if the employee voluntarily signs the covenant within the 14 days.
Enforcement of these covenants will be allowable if they include employee compensation equivalent to the employee’s base pay at the time of termination or equivalent to the period of enforcement less any compensation earned through subsequent employment during the period of enforcement.
However, the covenants will be prohibited when an employee is terminated, furloughed, or laid off as a result of circumstances or government orders related to Covid-19 or circumstances similar to Covid-19.
In addition, the amendments provide clarity as to what constitutes “adequate consideration” for a non-competition or non-solicitation agreement defining it as: 1) an employee working for two years after signing the agreement; 2) a period of employment plus additional professional or financial benefits; or 3) professional or financial benefits which are adequate by themselves.
They also include a standard of review for what constitutes a protectable legitimate business interest of an employer requiring that a totality of circumstances analysis be undertaken which includes the examination of factors such as the employee’s exposure to customer relationships or other employees, the employee’s acquisition, use or knowledge of confidential information through the employee’s employment, and the time, place, and scope of the restrictions.
Ultimately, the validity of a non-competition or non-solicitation agreement will now require the analysis of all of the facts and will be determined on a case-by-case basis. This could result in the same terms and restrictions being allowable for one employee and not another. Therefore, the drafting of the covenant should be carefully crafted for the situation, and it may require an employer to have more than one agreement.
In addition, despite the Courts now being given the ability to reform, sever or void an agreement after considering the fairness of the restraints, the good faith effort to protect a legitimate business interest, the extent of the information, and the authority included in the agreement to modify it, employers should not rely upon this to save them from overly broad restrictions, for employees who prove a violation can now recover reasonable attorney’s fees, costs and any other relief deemed appropriate by a Court or Arbitrator.
The final significant change the amendments provide is that the Illinois Attorney General will be able to undertake investigation, require statements and written reports in writing and under oath, examine under oath all persons alleged to have knowledge or to have participated, issue subpoenas to conduct hearings, investigation, or compel compliance with pre-suit investigation through court order, file civil suits and/or intervene in civil actions where there is reasonable cause to believe there is a pattern and practice of violation by the employer.
Should the Attorney General prove successful in bringing a cause of action, it can recover monetary damages to the State, restitution and equitable relief including an injunction, a restraining order or other orders as may be appropriate, and impose a $5,000.00 fine per violation or $10, 000.00 fine per repeat violation within a five-year period. Since each person subject to the agreement constitutes a separate violation, the aggregate penalties imposed on an employer for a violation relative to a standardized company restrictive covenant could be significant.
Therefore, as a result of the amendments, employers should have their existing agreements reviewed for compliance, determine if they require more than one agreement, and consider whether they want to change their hiring processes and procedures. Employees presented with a non-competition or non-solicitation agreement should always seek counsel, but it will be more important for agreements presented after January 1, 2022 to insure the preservation of their rights under the new law.
DISCLAIMER: The above is not and should not be interpreted as legal advice. It is for informational purposes only. You should consult an attorney for legal advice.