New Illinois legislation will limit restrictive agreements
This article is part of a new McDonald Hopkins series on developments in restrictive covenant law that will dive deeper into how employers can protect their business interests in light of state - and potentially federal - limitations, strategies for revising employers’ non-compete and non-solicitation agreements, and other topics that will help businesses navigate the changing landscape of employee restrictive covenants.
President Joe Biden’s most recent executive order makes clear that the administration intends to target non-compete agreements. This is part of trend. Over the past few years, laws aimed at limiting non-competes and other restrictive covenants for employees have become top priorities for state governments, in many cases gaining bipartisan support. Recently, Illinois joined Oregon, Washington, Massachusetts, Maine, New Hampshire, Rhode Island, and Maryland in this trend by amending the Illinois Freedom to Work Act (IFWA) to impose stricter limitations on employee non-competition and non-solicitation agreements. In this article we will discuss the amended Illinois statute and highlight the provisions that will have the most impact on businesses.
Changes under the Amended Illinois Freedom to Work Act
The Illinois Freedom to Work Act, passed in 2017, currently limits the use of restrictive covenants for employees making the legal minimum wage or less than $13 per hour, whichever is greater. The amendments to the IFWA, passed by the Illinois legislature on May 31 and expected to be signed by Gov. Pritzker before August, would significantly expand the scope of the law to a much broader section of the workforce. Many of these changes are in line with the limitations imposed by other states as well. The changes to the Illinois law include:
- Effective date: If signed, the IFWA amendments will take effect on January 1, 2022. The changes are not retroactive, meaning they will apply only to employment agreements entered into on January 1, 2022 and thereafter.
- Compensation level limitations: Non-competition agreements are prohibited for employees who earn $75,000 per year or less. Non-solicitation agreements are additionally prohibited for employees who earn $45,000 per year or less. These salary thresholds will increase every five years for 15 years.
- Review period for agreement: Employers are required to give employees at least 14 days to review non-compete and non-solicitation agreements. Employers must also notify employees of their right to consult an attorney before they enter into such agreements.
- COVID-19 limitations: Employers are prohibited from entering into non-competition and non-solicitation agreements with employees who lost their jobs due to the COVID-19 pandemic or similar circumstances, unless employers compensate restricted employees during the enforcement period.
- Attorneys’ fees: Employees who successfully defend against an employer’s claim for breach of non-compete or non-solicitation agreements may recover their costs and reasonable attorneys’ fees from the employer.
- Enforceability: The issue of when and whether additional consideration is necessary to support non-compete and non-solicitation agreements has vexed Illinois employers for years. The amendments clarify that employers must provide “professional or financial benefits” as consideration for a restrictive agreement to be enforceable. Lacking such benefits, “adequate consideration” is defined as “at least two years” of employment after signing the agreement. The revised standards also include other provision that will make it more challenging for employers to enforce their employment agreements in court.
Employer takeaways: Revise restrictive covenants and modify your strategy
Illinois employers still have time to revise their restrictive covenants and modify their strategies before the amended IFWA takes effect, as anticipate, at the beginning of 2022. In upcoming posts, we will discuss ways employers can protect their business interests, strategies for updating non-compete and non-solicitation agreements, and other issues that will help businesses navigate the changing landscape of employee restrictive covenants.