New Illinois restrictive covenant law to take effect Jan. 1, 2022November 17, 2021
Employers in Illinois beware: on Jan. 1, 2022, an amendment to the Illinois Freedom to Work Act (IFWA) will become effective, creating significant additional restrictions on the use of restrictive covenants in connection with employment. The amendment will be applicable prospectively to employment-related agreements entered into on or after Jan. 1, 2022. Accordingly, Illinois employers, as well as foreign companies with employees in Illinois, should take time now to review future agreements and ensure they are compliant with the IFWA.
What does the IFWA impact?
As an initial matter, employers must know two key facts:
- Which employment-related agreements the IFWA applies to; and
- Which types of restrictive covenants the IFWA applies to.
The IFWA applies prospectively to restrictive covenants entered into in connection with employment after Jan. 1, 2022. This includes amendments to pre-existing restrictive covenants, as well as agreements with employees who were employed before Jan. 1, 2022, but were not previously subject to a restrictive covenant. It will not impact restrictive covenants signed before that date. Notably, the IFWA does not replace currently applicable statutory, regulatory or common law on pre-2022 restrictive covenants. Employers should accordingly continue to monitor developments and consult with counsel on those laws, as they will continue to govern the restrictive covenants applicable to large portions of the workforce.
The IFWA also only applies to non-compete and non-solicitation covenants (both employee and customer) made in the employment context. Thus, non-disclosure and confidentiality agreements will remain unaffected. Likewise, agreements in which an employee agrees to not reapply for a job at the company after termination are excluded from the IFWA, as are invention assignment agreements and garden-variety leave provisions. Finally, non-competes and non-solicitations entered into outside of the employment context, in connection with the sale of a business for example, are not subject to IFWA.
Ways the IFWA limits non-compete and non-solicitation agreements
1. Ban on public sector union and construction industry agreements
The IFWA flat out bans non-competes and non-solicitation agreements with members of public sector unions, and with members of the construction industry, although there is a limited exception in the latter for management. Beginning on Jan. 1, 2022, employers in these sectors should remove all non-competes and non-solicitation provisions from their employment-related agreements.
2. Income limitations on enforceability
The IFWA also renders unenforceable all non-competes with employees earning less than $75,000 annually, and all non-solicitation agreements with employees earning less than $45,000 annually. The $75,000 annual threshold on non-competes will increase by $5,000 every five years, such that in 2027 it will be $80,000; in 2032 it will be $85,000; topping out at $90,000 in 2037. The $45,000 annual threshold on non-solicitations will likewise increase every five years, but only by $2,500, topping out at $52,500 in 2037.
In calculating earnings for purposes of determining whether an employee meets either of these minimum earnings thresholds, employers should not simply rely on salary/wages. Rather, the earnings calculation must include: salary, earned bonuses, commissions, wages, tips, amounts electively deferred by the employee (such as 401(k) contributions and 403(b) plans), HSA and FSA plans and contributions, and commuter benefit deductions.
3. COVID-related limitations on enforceability
Additionally, the IFWA mandates that non-compete and non-solicitation agreements are unenforceable if the employee is terminated or laid-off as a result of specified circumstances related to COVID-19. While the specifics of this mandate are outside the scope of this article, employers in Illinois should consult with counsel if they are anticipating making COVID-related workforce reductions and intend to enforce restrictive covenants against the terminated or laid-off employees.
4. Length of employment, notice period and other limitations
The IFWA also contains several mandates relating to consideration and procedure for restrictive covenants that employers must be aware of:
- The IFWA requires at least two years of post-execution, continued employment for any restrictive covenant subject to the IFWA to be enforceable. As a practical matter, this means that if an employee signs a restrictive covenant when hired and is subsequently laid-off within two years, the covenant is unenforceable. The IFWA provides an exception to this rule if the employer provides “additional professional and financial benefits” instead of two years of continued employment. However, the IFWA does not define these terms, nor is there any regulatory guidance. Accordingly, consult with counsel if you intend to rely on this exception.
- Employers must provide a copy of the restrictive covenant to the employee at least 14 days before their employment begins. Employers must also advise the employee in writing to speak with an attorney before signing the restrictive covenant.
- The IFWA largely codifies Illinois common law and provides that any non-compete or non-solicit is void unless it meets each of the following requirements:
- The covenant is ancillary to a valid employment relationship;
- The covenant is no greater than is required for the protection of a legitimate business interest of the employer;
- The covenant does not impose undue hardship on the employee; and
- The covenant is not injurious to the public.
Penalties and enforcement
Employers will face stiff consequences for attempting to enforce non-compete and non-solicitation agreements that violate the IFWA. An employee who prevails on an employer’s claim to attempt to enforce a violative covenant will (not “may”) recover attorneys’ fees and costs. In addition, the IFWA empowers the state Attorney General’s office to investigate employers who may be engaged in a “pattern or practice” of violative behavior. If they are found to be, the AG may impose a civil penalty of $5,000 for each violation or $10,000 for each repeat violation within a five-year period.
Key takeaways for employers
The IFWA continues the trend of increasing hostility toward restrictive covenants required in connection with employment. With both that trend and the specific provisions of the IFWA in mind, it is advisable to:
- Review all employment-related agreements now to ensure they are fully compliant with the IFWA beginning on Jan. 1, 2022, and have your counsel do the same.
- In addition to the straight-forward bans the IFWA imposes (which should be relatively easily avoided), remember that the fee-shifting and civil penalty provisions apply to any violation of the IFWA—including for attempting to enforce non-competes or non-solicitations that are improper in scope, geography or duration.
- For the above reasons, and because employment agreements pre-dating the IFWA will continue to be analyzed under the familiar principles of Illinois non-compete law, keep abreast of developments in those areas of law and routinely consult counsel.
- Reconsider whether it is really necessary to include a non-compete and/or non-solicitation provision in the employment agreements of various categories of employees. In addition to statutory developments such as the IFWA, courts are becoming increasingly hostile to restrictive covenants that adversely impact someone’s ability to work. To that end, although the IFWA places its limitations at the $75,000 and $45,000 thresholds, consider a (perhaps significantly) higher internal threshold, such that only truly vital employees are subject to restrictive covenants.
For more information on this topic, or to learn how Godfrey & Kahn can help, contact a member of our Labor, Employment & Immigration or Non-Competition & Trade Secrets practice groups.