The Non-Compete Landscape Gets Even Smaller With Recent Changes To Illinois Law. Here's What Business Owners Need To Know
Many business owners require key employees to sign non-competition and non-solicitation agreements to protect their clients, other employees, and confidential information from being poached or misappropriated when the employment relationship ends. These restrictive covenants have always drawn skeptical eyes from judges in Illinois, but their utility and enforceability has now become even more limited under amendments to the Illinois Freedom to Work Act signed by Gov. JB Pritzker on August 13, 2021.
SB672, which applies to all agreements dated on or after January 1, 2022, dramatically transforms the legal landscape for these contractual provisions.
For decades, Illinois courts have not hesitated to hold non-competition or non -solicitation agreements unenforceable or rewrite them, especially if they are overly broad in duration and geographic scope, are unsupported by adequate consideration, or involve lower-wage employees.
The new amendments codify many aspects of the courts’ analysis of restrictive covenants, establish clear limitations on when employers can use them, and clarify the rights of employees when presented with such agreements.
Here is what business owners need to know about non-competition and non-solicitation agreements in Illinois as of New Year’s Day 2022:
Unenforceable For Lower Earning Employees
Perhaps the most straightforward and impactful part of the amendments is that they completely prohibit non-competes and non-solicitation agreements for employees below specific income thresholds. Specifically:
- Non-competition agreements are void and unenforceable with respect to employees who have expected annual earnings of less than $75,000.
- Customer/employee non-solicitation agreements are void and unenforceable as to employees who have expected earnings of less than $45,000 per year.
These baseline earning amounts will increase in 2027 and every five years thereafter.
Judges Must Find a “Legitimate Business Interest” and Consider the “Totality of Circumstances” When Evaluating Restrictive Covenants
When evaluating the enforceability of non-competes and non-solicitation agreements, Illinois judges have traditionally looked at the facts and circumstances surrounding a specific provision and determined whether the employer has narrowly tailored the limitations to protect its “legitimate business interests.”
The recent amendments affirm and codify this case-by-case approach, explicitly providing that “the same identical contract and restraint may be reasonable and valid under one set of circumstances and unreasonable and invalid under another set of circumstances.”
The new law lists several factors a judge may consider when determining whether a legitimate business interest exists, including:
- 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 scope of time, place, and activity restrictions.
Sufficient, Independent Consideration Needed
Every enforceable contract must be supported by adequate consideration, including those containing restrictive covenants. The amendments define “adequate consideration” sufficient to support such an agreement as:
- Employment for at least two years after signing an agreement containing a covenant not to compete or a covenant not to solicit, or
- Other consideration adequate to support an agreement not to compete or solicit, such as a defined period of employment plus additional financial or professional benefits or merely professional or financial benefits adequate
Employee Must Have an Opportunity to Review
Employers will now need to provide employees 14 days to review a proposed non-competition/non-solicitation agreement and advise them in writing when they present it that the employee should consult with an attorney before signing it.
Judges Retain Discretion to Revise Overreaching Restrictive Covenants
The new law codifies the discretion judges have traditionally used to reform or rewrite overly broad or otherwise legally deficient restrictive covenants – a practice known as “blue penciling” - instead of holding the entire covenant void and unenforceable.
COVID-19 Enforcement Limitations
The law also insulates an employee from the limitations contained in an otherwise valid restrictive covenant if they were terminated, furloughed, or laid off due to the COVID-19 pandemic. However, an employer may be able to enforce a covenant under those circumstances if enforcement of the covenant includes compensation equivalent to the employee's base salary during the period of enforcement, minus compensation earned through subsequent employment during the enforcement period.
As noted, the amendments became effective on January 1st of this year and will not apply to pre-existing restrictive covenants. But business owners who frequently use non-competition or non-solicitation agreements should consult with an experienced business attorney who can review such agreements in light of the new law.
If you have questions or concerns about these changes to the law or if you need assistance reviewing or revising your non-competition agreements, please contact Saskia Bryan at Latimer LeVay Fyock.