Illinois Joins Growing List of States to Take on Non-Compete Agreements

On January 1, 2022, Illinois will not the growing list of states taking substantial action against non-compete agreements.  The new act will amend the Illinois Freedom to Work Act (“IFWA”) will take effect, and will render non-compete agreements with employees earning less than $75,000 annually unenforceable. Additionally, employers will be prohibited from entering into non-solicitation agreements with employees who earn less than $45,000 annually.  The amendment also imposes strict pre-employment notification requirements and helps protect employees from lawsuits to enforce a non-compete or non-solicitation agreement by imposing mandatory fee-shifting if an employer is unsuccessful in litigation.

Income Based Restrictions

The amended IFWA will apply to agreements entered into on or after January 1, 2022. Thereafter, enforceability of non-competition and non-solicitation agreements will hinge on the employees’ compensation level. In determining whether an employee will be subject to the new amendment, employers must calculate an employee’s total compensation, which will include the employee’s salary, but also earned bonuses; commissions; wages; tips; and amounts electively deferred by the employee, including 401(k) contributions, 403(b) plans, flexible spending accounts, health savings accounts, and commuter benefit-related deductions.

The amended IFWA also provides that the income threshold for the restriction on non-compete provisions will increase by an amount of $5,000 every five years, topping out at $90,000 in 2037.

Similarly, the threshold for the restriction on non-solicitation agreements will increase by $2,500 every five years until 2037.

Finally, non-compete and non-solicitation agreements will be unenforceable if the employee is terminated, furloughed, or laid off as a result of certain circumstances related to COVID-19 or a similar situation.

However, if the employee’s employment is ended for one of these reasons, an otherwise enforceable agreement may still be enforceable if the employer pays the employee (i) an amount equal to the employee’s base salary at the time of termination, (ii) for the period of enforcement of the restrictive covenant, (iii) minus any compensation earned by the employee through other sources of employment during the enforcement period.

Additional Requirements

Additionally, in order for a restrictive covenant to be enforceable, the amended IFWA requires at least two years of continued employment following the employee’s execution of a restrictive covenant.

Additionally, employers will be required to provide a copy of the non-competition and/or non-solicitation agreement to the employee 14 days prior to the start of employment. Employers must also advise the employee in writing to consult with an attorney in connection with the restrictive agreement prior to signing.

Potential Consequences

In addition to the risk of unenforceability, employers will face enhanced risks when attempting to enforce a restrictive agreement against former employees. Under the amended IFWA, employees who prevail on an employer’s claim to enforce will recover all costs and reasonable attorneys’ fees. Therefore, employers will need to take extra care to ensure their restrictive agreements meet the IFWA’s conditions, or attempted enforcement will be pointless, and expensive.  Additional civil penalties are also provided for employers who engage in a “pattern or practice” of violating the Act.

Certain Types of Agreements Not Affected

Although non-competes and non-solicitation agreements entered into before January 1, 2022 are excluded from the amended IFWA, the IFWA excludes some fairly common employee restrictions from its strict limitations.  Specifically, non-disclosure and confidentiality provisions and agreements will remain unaffected. In addition, contract clauses requiring advanced notice of termination and agreements where the employee agrees not to reapply after termination are likewise left unimpacted by the IFWA.

Conclusion

After January 1, 2022, employers in Illinois will need to take careful steps to ensure any new employees who they wish to sign non-compete or non-restrictive agreements meet the requirements of the amended IFWA.