Illinois has enacted a new law governing restrictive covenants: Public Act 102-0358. This law outlines the requirements for valid noncompetition and nonsolicitation agreements, and enforcement of those covenants. It will apply to all agreements entered into on or after January 1, 2022.
- This legislation allows an employee to recover costs and reasonable attorney’s fees if the employee prevails in an action seeking to enforce a noncompetition or nonsolicitation agreement.
- Subject to certain carve-outs, this legislation sets income thresholds for noncompetition agreement and nonsolicitation agreements: the employee must earn more than $75,000 per year to be bound by a noncompete and more than $45,000 per year to be bound by a nonsolicit.
- The legislation requires that employers advise employees, in writing, to consult with counsel before entering into a noncompetition or nonsolicitation agreement, and that employees be afforded 14 days to review the covenant before signing.
- The legislation sets adequate consideration for a noncompetition agreement or nonsolicitation agreement: two years of employment or a period of employment plus other professional or financial benefits. Employers will need to consider what additional professional or financial benefits they will offer as consideration beyond simple at-will employment.
- The legislation outlines what legitimate interests support a covenant, but it provides judicial leeway to determine the reasonableness and enforceability of a covenant.
- The legislation discourages, but does not absolutely prohibit, judicial reformation of restrictions—“blue penciling.”
This legislation imposes potentially significant costs for employers by including a fee-shifting provision. That, plus the disapproval of blue penciling, is meant to encourage employers to ask for limited restrictions in the first instance.
While many provisions—such as the notice provision—are easy to follow, it is likely that employers will face disparate outcomes on the reasonableness of their restrictions. With few bright line rules, the legislation allows significant leeway to courts in determining the validity and enforceability of agreements.
This combination presents risks for employers who want to be able to enforce their agreements. Employers, therefore, should consult with counsel before implementing any noncompetition or nonsolicitation agreements after January 1, 2022, for new or current employees.
WHAT IS COVERED?
This legislation applies to noncompetition agreements and nonsolicitation agreements entered into after January 1, 2022. It defines each as follows:
- A covenant not to compete is an agreement between an employer and employee that restricts the employee from (1) performing any work for another employer for a specified period of time; (2) performing any work in a specified geographical area; or (3) performing work for another employer that is similar to the employee’s work with the employer that the agreement is with. A covenant not to compete also includes an agreement that imposes adverse financial consequences to the employee for engaging in competitive activities after the termination of employment, such as a bonus clawback provision.
- A covenant not to solicit is an agreement between an employer and employee that restricts the employee from (1) soliciting for employment the employer’s employees, or (2) soliciting (for the purposes of selling products or services of any kind) or interfering with the employer’s relationships with clients, vendors and suppliers (or prospective clients, vendors and suppliers).
Exempted from these definitions are the following: (1) confidentiality agreements; (2) agreements governing the disclosure of trade secrets or inventions; (3) invention assignments; (4) covenants not to compete associated with the sale of a business or business interest; (5) clauses requiring notice before termination, so long as the employee is employed by the employer and paid by the employer during the notice period; and (6) agreements to not reapply for employment with the employer after termination.
WHAT MAKES A COVENANT VALID AND ENFORCEABLE?
There are five factors governing the enforceability of a noncompetition agreement or nonsolicitation agreement:
- The employee must receive adequate consideration. There is adequate consideration if (a) the employee worked for the employer for at least two years after the employee signed the agreement, or (b) the employer provided the employee with a period of employment as well as additional professional or financial benefits.
- The covenant must be tied to a valid employment relationship.
- The covenant is no greater than required for the protection of a legitimate business interest of the employer. This is determined by the totality of the circumstances of the individual case, including (a) the employee’s exposure to the employer’s customer relationships or employees; (b) the near-permanence of customer relationship; (c) the employee’s knowledge or use of confidential information; (d) the length of the restriction; (e) the geography of the restriction; and (f) the scope of the restriction.
- The covenant does not impose an undue hardship on the employee.
- The covenant is not injurious to the public.
Importantly, the legislation does not define what additional “professional or financial benefits” will constitute adequate consideration. Employers will need to consider offering additional consideration beyond at-will employment—e.g., a sign-on bonus, equity grant, year-end bonus, etc.—or risk having an unenforceable restriction if the employee leaves after working less than two years.
The legislation also explicitly asks for individualized consideration of the above factors, noting that what is reasonable for a contract in some circumstances may be unreasonable for the same contract in other circumstances.
Additionally, to be enforceable, the employer must give the employee adequate notice of the agreement. This means advising the employee, in writing, that they should consult with an attorney before entering in the agreement. It also means that the employee must be given 14 days to review the agreement and sign it, though it may be signed earlier at the employee’s election.
WHAT IS ABSOLUTELY PROHIBITED?
This legislation does include a few bright-line rules, setting the following absolute prohibitions:
- Employers cannot enter into covenants not to compete with employees whose annualized rate of earnings are less than $75,000 a year. Likewise, there cannot be nonsolicitation agreements for employees whose annualized rate of earnings are less than $45,000. There are escalators in these thresholds every five years. Earnings includes all forms of taxable compensation reflected on a W-2, including bonus, commissions, tips and employer contributions to benefits plans.
- Employers cannot enter into noncompetition agreements or nonsolicitation agreements with employees who were terminated, furloughed or laid off as a result of business circumstances related to the COVID-19 pandemic or a similar pandemic unless the covenant pays the employee certain additional compensation.
- Employers cannot enter into noncompetition agreements with individuals covered under the Illinois Public Labor Relations Act or Illinois Educational Labor Relations Act.
- Employers cannot enter into noncompetition agreements with construction workers unless those construction workers perform management, engineering, architectural, design or sales functions, or those construction workers are shareholders or partners of the employer.
ENFORCEMENT AND REMEDIES
The legislation encourages employees to impose limited restrictions by including a fee-shifting provision. If an employee prevails on an enforcement action, the employee can recover all costs and all reasonable attorney’s fees for that action.
The legislation reinforces this by limiting blue-penciling—a practice where courts can revise agreements to comply with what is deemed reasonable—because the availability of unlimited blue penciling encourages broad provisions that can be whittled down but still enforced. Courts have limited discretion to blue pencil; they may do so if the original constraints were fair as written and reflected a good faith effort to establish reasonable restrictions. Blue penciling also may be available by explicit agreement by the parties.
The legislation does allow for enforcement by the State Attorney General where there is reasonable cause to believe that a person or entity is engaged in a pattern or practice prohibited by the legislation. The legislation outlines certain procedures for that enforcement, and it permits civil penalties.