As states across the country continue to impose limitations on non-competition and non-solicitation agreements between employers and employees, Illinois has recently followed suit by codifying new restrictions. On May 31, 2021, Illinois’ state legislature passed Senate Bill 672, which will amend the Illinois Freedom to Work Act to both clarify existing limits and expand restrictions on these agreements. The new law was signed on August 13, 2021 and will officially go into effect on January 1, 2022.
The Illinois Freedom to Work Act was initially passed in 2017 in part to prohibit covenants not to compete for low wage earners, defined as employees earning up to $13.00 her hour or minimum wage. The newly enacted Senate Bill 672 will change these prohibitions to include a ban on non-compete agreements with Illinois employees who have expected annual earnings of less than $75,000. In addition to non-compete agreements, employers will not be able to enter into enforceable non-solicitation agreements with employees who have expected annual earnings of less than $45,000.
In the past, an employee’s continued employment alone could sometimes constitute adequate consideration to support the validity of a non-competition/non-solicitation agreement. However, Senate Bill 672 will codify a development in Illinois case law that holds continued employment alone can consist of adequate consideration only if the employee works for the employer for at least two years after the employee signed the restrictive agreement. However, the new law elaborates that adequate consideration may exist when other financial or professional benefits are included, even if the employee does not work for the two years following the signing of the restrictive covenant.
Illinois employers utilizing restrictive covenant agreements must also demonstrate a legitimate business interest in order for a court to hold the agreement enforceable. Senate Bill 672 advises that a “legitimate business interest” is determined by considering “the totality of the facts and circumstances of the individual case.” These factors consist of the time, place, and scope of the employees’ potential competing activities, as well as the employee’s access to the employer’s confidential materials and customer relationships.
Employers must also provide employees 14 days to review the non-competition or non-solicitation agreement and must advise the employee in writing at the same time that they should consult an attorney before signing.
If the restrictive covenant ends up in Court, Senate Bill 672 permits a court to use their discretion to modify; rewrite; or sever provisions of the agreement in lieu of simply holding the entire agreement as unenforceable. If an employee prevails in getting the court to rewrite or hold the agreement unenforceable, the law allows for the employee to recover their costs and attorneys’ fees from the employer.
Senate Bill 672 reflects a growing judicial disfavor against non-competition and non-solicitation agreements. Illinois employers will have to be careful when asking employees to sign judicial covenants and must balance their business interests with the risk that employees may challenge these agreements in Court and, if successful, will be able to recover their costs and fees for having to do so.
While Senate Bill 672 is specific to Illinois, it is anticipated that more states will adopt similar laws in the coming years. Many courts, including those in Ohio, frequently look for ways to narrow or otherwise invalidate restrictive covenants. It is therefore critical that employers tailor any restrictive covenants to those specific to the employer’s needs; review and update their covenants on a regular basis; and consult with legal counsel to keep up with changes in the laws.
