Illinois is following the national trend to place limitations on employers’ use of non-competes and non-solicit covenants. Some states have banned them altogether or prohibited them for certain professions. In 2016, Illinois took the first step by enacting the Illinois Freedom to Work Act (IFWA) which prohibited employers from entering into non-competition covenants with “low-wage” employees ($13.00 an hour or the applicable minimum wage). Illinois amended the IFWA effective January 1, 2022 to further restrict the use of non-competition and non-solicit covenants.
Some of the material changes include:
- The law applies to non-solicitation covenants and non-competition covenants. Non-solicitation covenants include a covenant not to solicit employees as well as a covenant not to solicit clients.
- The concept of a “low-wage” employee was removed and instead the covenants are enforceable only if the employee earns above a certain income each year. Non-competition covenants are enforceable only if the employee’s earnings exceed $75,000 a year. Non-solicitation covenants are enforceable only if the employee’s earnings exceed $45,000 a year. These income thresholds will increase every 5 years.
- If an employee is terminated or furloughed due to COVID-19 or a similar event, the employee’s non-compete and non-solicit covenants are unenforceable unless the employer pays the terminated or furloughed employee the employee’s regular base salary during the covenant restriction period. The employer may subtract any amounts earned by the employee through subsequent employment during the restricted period. Employers should be clear when terminating an employee whether the termination is due to COVID-19 or some other reason.
- The covenant not to compete and non-solicitation covenant are enforceable only if the employee receives “adequate consideration.” Adequate consideration can come in two forms: length of employment for two or more years after entering into the restrictive covenants or professional/financial benefits. Therefore, a non-compete or non-solicit covenant is not enforceable if the employee resigns or is terminated before two years or if there are not separate benefits attributable to the covenants.
- The covenants must be protecting a legitimate business interest of the employer. The law provides several examples or factors to determine whether there is legitimate business interest.
- The employer must tell the employee in writing to consult with an attorney before signing the covenant not to compete or covenant not to solicit.
- The employer must allow the employee at least 14 days to review the covenants. If the employee signs the agreement before the expiration of the 14 days, the employee waives the remaining time.
This change in the law does not affect the effectiveness of agreements entered into before January 1, 2022. Employers should review their employment agreements and hiring/termination practices in light of the new changes in this area of law.