Illinois Bill Modifying Non-Competition Agreements Nears Enactment
Illinois Gov. JB Pritzker is expected to soon sign into law a bill that will make significant changes to the Illinois Freedom to Work Act and affect the enforceability of employee non-competition provisions. The General Assembly passed the amended act on May 31, 2021.
The Illinois Freedom to Work Act originally was enacted to prohibit employers from requiring low-wage employees to enter into non-competition agreements. The proposed changes to the Act affect agreements entered into on or after Jan. 1, 2022. These changes, among other things, limit who can be required to enter in a non-competition agreement, specify the consideration necessary to support a non-competition agreement, set forth some of the factors that a court is to consider in assessing whether the non-competition provisions are enforceable under the circumstances, clarify the authority of courts to modify the language of overly broad agreements to make them enforceable and provide a minimum time for an employee to review a non-competition agreement before being required to sign. Non-competition provisions would include general covenants not to compete as well as customer and employee nonsolicitation obligations.
Once the bill is enacted, employers may not enter into a covenant not to compete with an employee who earns or is expected to earn $75,000 or less per year. Similarly, employers may not enter into an employee nonsolicitation or customer nonsolicitation agreement with an employee who earns or is expected to earn $45,000 or less per year. These salary thresholds increase over time. Further, covenant not to competes are void with respect to public sector employees covered by a collective bargaining agreement or individuals employed in construction, other than those employees of construction employers who "primarily perform management, engineering or architectural, design, or sales functions."
Existing and newly hired employees must be advised in writing to consult an attorney before signing a non-competition agreement and must be afforded at least 14 days to review the agreement before being required to sign.
"Adequate consideration" supporting a non-competition agreement is defined to mean at least two years of employment, or "consideration adequate to support an agreement not to compete or not to solicit." Unfortunately, the statute does not explain what constitutes adequate consideration outside of two years of employment or provide any guidance on how a court is supposed to make this assessment.
The legitimate business interest of the employer sufficient to support a covenant not to compete or a nonsolicitation obligation would be determined based on "the totality of the facts and circumstances of the individual case" and "each situation would be determined on its own particular facts." The bill lays out several factors for a court to consider, including the following:
- the employee's exposure to the employer's customer relationships or other employees
- the near-permanence of customer relationships
- the employee's acquisition, use, or knowledge of confidential information through the employee's employment
- the time restrictions, the place restrictions
- the scope of the activity restrictions
Reformation, or "blue-penciling" by a court of an overly broad covenant not to compete or nonsolicitation obligation would be permissible but not required. However, the bill makes clear that extensive reformation is to be discouraged and that the court should consider "the fairness of the restraints as originally written, whether the original restriction reflects a good-faith effort to protect a legitimate business interest of the employer, the extent of such reformation, and whether the parties included a clause authorizing such modifications in their agreement." Thus, it will be important for employers to carefully craft the scope of the restrictions and to narrow those restrictions as much as practicable while still securing adequate protection for their legitimate business interests.
There are special provisos in the bill for employees who are furloughed or laid off as a result of the COVID-19 pandemic. Specifically, a non-competition agreement may not be enforced unless the agreement also provides for payment of the employee's base salary for a period of time.
There is a greater risk to employers in seeking to enforce a non-competition agreement under the amendments. If the employee prevails in the litigation, the employee must be awarded reasonable attorney's fees. Finally, the Illinois Attorney General would be authorized to sue employers that violate the Act on a regular basis.
Although the amendments to the Freedom to Work Act would not take effect until next year, employers should give thought to reviewing and, where appropriate, update their current non-competition agreements and policies for who is required to sign them in order to maximize enforceability.
For more information or assistance on this topic, please contact the authors or other members of Holland & Knight's Labor, Employment and Benefits Group.
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