Alert: New Illinois Amendment Significantly Limits Use of Restrictive Covenants
Following the lead of several other states, effective January 1, 2022, Illinois will make sweeping changes to its Freedom to Work Act (“Act”), limiting employers’ ability to restrict employees through covenants not to compete and covenants not to solicit.
The Act originally was enacted to prohibit employers from requiring low-wage employees to enter into non-competition agreements. But the new amendments to the Act prove to be even more employee-friendly by limiting which employees can be forced to enter into non-competition agreements and providing a minimum time for employees to review a non-competition agreement before being required to sign. Importantly, as the legislation is currently drafted, existing restrictive covenants would not be impacted by this law.
Specifically, some of the key aspects of the new amendments to the Act are:
- Prohibits covenants not to compete for employees making less than $75,000 per year in earnings (including any commissions or bonuses). This threshold will increase over time (by $5,000 every five years) until the threshold becomes $90,000 in January 2037.
- Prohibits customer non-solicitation agreements and employee non-solicitation agreements for employees making less than $45,000 per year in earnings. This threshold will increase in $2,500 increments every five years until it becomes $52,500 in January 2037.
- Makes covenants not to compete or not to solicit void and illegal unless the employer: (a) provides employees 14 days to review an agreement containing a covenant not to compete or not to solicit and (b) advises the employee in writing to discuss the agreement with an attorney.
- Codifies the “two-year rule” followed by certain Illinois state courts, requiring either (a) two years of employment or (b) alternative “adequate” consideration to make a non-compete or non-solicitation agreement enforceable.
- Bans enforcement of covenants not to compete for employees who are terminated or furloughed as a result of COVID-19 or “circumstances that are similar to the COVID-19 pandemic” unless certain compensation is provided to the employee.
- Mandates the recovery of attorneys’ fees and costs by an employee who prevails in a lawsuit brought by the employer seeking to enforce a covenant not to compete or covenant not to solicit.
To prepare for the effective date of the legislation on January 1, 2022, Illinois employers should create new employment agreements that comply with the law for applicable future employees.
Although existing restrictive covenants will not be impacted by this new legislation, some interesting questions are still unanswered and will need to be clarified by regulation, such as whether existing restrictive covenants are grandfathered indefinitely or if new limitations will apply when the employment agreement is revised or automatically renewed. Thus, now is the time for all Illinois employers to review their existing non-compete and non-solicit agreements to ensure they provide adequate protection.
At ByrdAdatto we are working hard to ensure our clients are well equipped and ready for operating their business. If you have questions regarding this alert, email us at email@example.com or call 214-291-3200.