Governor J.B. Pritzker recently signed into law Public Act 102-0358 (“Act”), which dramatically reforms the law in Illinois governing both noncompete and nonsolicit provisions. The Act is not retroactive, and goes into effect on January 1, 2022. All noncompete and nonsolicit provisions entered into “after the effective date” of the Act will be null and void unless they comply with the Act’s requirements.
As we’ve previously described, the Act is truly a remarkable accomplishment by the Illinois Legislature: a unanimous and comprehensive reform of noncompete and nonsolicit law for all Illinois employees. The Act’s new requirements are both substantive and procedural.
- Noncompete Provisions: $75,000. The Act states that noncompete provisions are “void and unenforceable” unless the employee’s “actual or expected annualized rate of earnings exceeds $75,000 per year.” This earnings threshold increases to $80,000 per year on January 1, 2027, and by $5,000 increments on January 1, 2032 and 2037.
- Nonsolicit Provisions: $45,000. Nonsolicit provisions are “void and unenforceable” under the Act unless the employee’s “actual or expected annualized rate of earnings exceeds $45,000 per year.” This earnings threshold increases to $47,500 per year on January 1, 2027, and by $2,500 increments on January 1, 2032 and 2037.
- Definition of “Earnings”: The Act broadly defines “earnings” to include “earned salary, earned bonuses, earned commissions, or any other form of taxable compensation, reflected or that is expected to be reflected as wages, tips, and other compensation on the employee’s IRS Form W-2 plus any elective deferrals not reflected as wages, tips, and other compensation on the employee’s IRS Form W-2,” such as contributions to a 401(k) plan, flexible spending and health savings accounts, and commuter benefit-related deductions.
Covenants Not to Compete and Covenants Not to Solicit Defined
- Covenant Not to Compete: Under the Act, a “covenant not to compete” is defined to mean an agreement that restricts an employee from performing (1) any work for another employer for a specified period of time, (2) any work in a specified geographical area, or (3) work for another employer that is similar to the employee’s work for the employer.
This definition is not limited to post-employment covenants not to compete, which means the Act governs covenants not to compete with the employer during employment. Such “no moonlighting” restrictions are common. However, the Act does not ban company policies, such as handbook policies, from prohibiting competitive or disloyal activities during employment.
Covenants not to compete are also defined to mean an agreement between an employer and an employee that “imposes adverse financial consequences on the former employee if the employee engages in competitive activities” after the termination of employment.
- Exclusions: The Act specifies that several different types of provisions are not covenants not to compete and therefore not governed by it: (1) a covenant not to solicit (separately defined); (2) confidentiality / non-disclosure provisions; (3) covenants prohibiting the use or disclosure of trade secrets; (4) invention assignment agreements or covenants; (5) covenants entered into for the purpose of selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest; (6) clauses or agreements requiring advance notice of termination of employment, “during which notice period the employee remains employed by the employer and receives compensation” (i.e., “garden leave” clauses); and (7) agreements by which the employee agrees not to reapply for employment (i.e., no-rehire provisions in severance and settlement agreements).
- Definition of “Covenant Not to Solicit”: The Act defines a “covenant not to solicit” to mean an agreement that restricts an employee from (1) soliciting the employer’s employees or (2) soliciting, “for the purpose of selling products or services of any kind to, or from interfering with the employer’s relationships with, the employer’s clients, prospective clients, vendors, prospective vendors, suppliers, prospective suppliers, or other business relationships.”
The Act imposes notice requirements to ensure that employees are informed about their noncompete and nonsolicit obligations. Noncompete and nonsolicit provisions will be “illegal and void” unless:
- the employer advises the employee in writing to consult with a lawyer before entering into the provision (just like the Older Worker Benefit Protection Act (OWBPA) requirement for releasing federal age discrimination claims), and
- the employer provides the employee a copy of the provisions either (1) at least 14 “calendar days” before the employee begins employment, or (2) the employer provides the employee with at least 14 “calendar days” to review the provision. Importantly, employers are in compliance with this notice requirement if the employee voluntarily elects to sign the provision before the 14-calendar-day period expires.
Codification of Common Law Principles
The Act codifies the main aspects of the common law standard developed to analyze covenants not to compete and covenants not to solicit.
- Standard for Enforceability: Under the Act, covenants not to compete and covenants not to solicit are “illegal and void” unless (1) the employee “receives adequate consideration,” (2) the covenant is ancillary to a valid employment relationship, (3) the covenant is no greater than is required for the protection of a “legitimate business interest” of the employer, (4) the covenant does not impose undue hardship on the employee, and (5) the covenant is not injurious to the public.
- “Adequate Consideration” Defined: Litigants have debated what constitutes adequate consideration for covenants not to compete and covenants not to solicit for decades, and have done so with particular vigor since the Illinois Appellate Court issued the seminal decision, Fifield v. Premier Dealer Servs., 2013 IL App (1st) 120327. The Act specifically defines “adequate consideration” to mean (1) the employee worked for the employer for at least two years after signing the agreement containing the covenant, or (2) “the employer otherwise provided consideration adequate to support an agreement to not compete or to not solicit, which can consist of a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.” Though somewhat vague, and requiring court interpretation, this definition provides employers with some options, likely including a signing bonus, raise, a promotion, training, professional exposure and marketing, incentive compensation such as stock options or restricted stock, other bonuses, separation pay, or other employee benefits.
- “Legitimate Business Interest” Considerations: The Act codifies current Illinois Supreme Court precedent holding that in determining the employer’s legitimate business interest, “the totality of the facts and circumstances of the individual case shall be considered. Factors that may be considered in this analysis include, but are not limited to, the employee’s exposure to the employer’s customer relationships or other employees, the near-permanence customer relationships, the employee’s acquisition, use, or knowledge of confidential information through the employee’s employment, the time restrictions, the place restrictions, and the scope of the activity restrictions.” No one factor carries more weight than any other; the importance of any particular factor depends on the specific facts and circumstances.
- Reformation: The court’s discretion to reform an overbroad covenant to render it reasonable is codified by the Act, but cabined. The Act specifies that extensive judicial reformation “may be against the public policy of this State and a court may refrain from wholly rewriting contracts.” Factors to be considered “include the fairness of the restraints as originally written, whether the original restriction reflects a good-faith effort to protect a legitimate business interest of the employer, the extent of such reformation, and whether the parties included a clause authorizing such modifications in their agreement.”
Remedies for Employees
The Act provides new remedies for employees who prevail in litigation over covenants not to compete and not to solicit filed “by an employer” (but not by the employee), including attorney’s fees: “[I]f an employee prevails on a claim to enforce a covenant not to compete or covenant not to solicit, the employee shall recover from the employer all costs and all reasonable attorney’s fees regarding such claim to enforce ….” This provision only applies when the employer sues to enforce a covenant, not to declaratory judgment actions in which the employee seeks a ruling a covenant is unenforceable.
Other Unique Components
- State Attorney General Enforcement: The attorney general may initiate or intervene in litigation when it has “reasonable cause to believe that any person or penalty is engaged in a pattern and practice prohibited” by the Act. The Act also authorizes the attorney general to request a civil penalty and money damages payable to the state, restitution, and equitable relief, but the court has discretion whether to award any such penalty or other relief. The attorney general may also initiate an investigation of potential violations.
- COVID-19 and Similar Circumstances Exception: The Act contains an exception for employees terminated or furloughed because of the COVID-19 pandemic or other similar circumstances. In that situation, the employer is barred from enforcing such a covenant not to compete or solicit unless enforcement of the covenant includes compensation equivalent to the employee’s base salary at the time of termination for the period of employment, less any compensation earned through subsequent employment during the period of enforcement.
- Collective Bargaining Agreement Exception: Under the Act, covenants not to compete and covenants not to solicit are void and illegal with respect to individuals covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act, and with respect to individuals “employed in construction,” except for construction employees who primarily perform management, engineering or architectural, design, or sales functions, or who are shareholders, partners, or owners in any capacity.
Choice of Law Workaround? Unlikely.
The Act does not expressly prohibit choice of law provisions pursuant to which another state’s law would govern covenants not to compete or covenants not to solicit. However, courts may determine that the Act represents the public policy of Illinois and on that basis refuse to recognize a choice of law provision, particularly where the other state’s law does not impose, for example, the notice protections (e.g., Delaware).
What Employers with Illinois Employees Should Do Now
Employers with Illinois employees can take a number of steps in advance of the January 1, 2022, effective date of the Act:
- Review existing agreements in light of the Act’s provisions and ensure that the agreements include, at a minimum, the new notice requirements—i.e., the 14-calendar-day review period and written advice to seek counsel from an attorney before signing.
- Given the Act’s salary thresholds and consideration requirements, reassess which employees truly warrant post-employment noncompetition and/or nonsolicitation restrictions.
- Reexamine the consideration provided to employees in exchange for signing. Is it adequate? Should practices be changed with respect to promotions, bonuses, training, or participation in severance plans or stock option plans?
- Be sure to include a “no moonlighting” policy in your employee handbook, as such policies are not “agreements” subject to the Act.
- Consider moving to garden leave (a.k.a. advance notice) agreements rather than traditional covenants not to compete.
For more information about this Insight, please contact:
|Peter A. Steinmeyer|
|Brian E. Spang |