Illinois Bill to Further Limit the Use of Restrictive Covenants with Referral Employees to the Governor’s Office
The Illinois General Assembly passed a major bill on May 31, 2021, which further limits and clarifies the circumstances under which restrictive covenants can be enforced against Illinois employees. Governor JB Pritzker is expected to sign the bill.
The result of in-depth negotiations between interest groups representing both employees and companies, the new law imposes several unique regulations on agreements with non-competition clauses. and undertakes not to solicit.
The new law comes into force on January 1, 2022 and applies to agreements concluded after that date.
Illinois initially regulated restrictive covenants with the Freedom to Work Act (2017), which prohibited “non-compete clauses” for “low-wage employees”, defined as those earning a legal minimum wage or less than $ 13.00 per hour, whichever is greater. It was not clear whether the law’s definition of “covenants not to compete” included covenants not to solicit customers or employees.
New law will amend freedom of work law to clearly apply to both non-competition clauses and undertakes not to solicit. This is an important change, as other states that have recently regulated restrictive covenants have generally do not expressly undertakes not to solicit.
The new restrictions on covenants not to solicit would apply not only to provisions to prohibit the solicitation of customers and vendors, but also the solicitation of employees. The law excludes certain types of agreements from the definition of a “non-compete covenant”, including confidentiality provisions, invention assignment agreements and commitments entered into in connection with the sale of a business. , among others.
Expansion of the indemnification threshold for restrictive covenants
The new law will significantly increase the threshold of compensation for enforceable restrictive covenants.
Under the new law, non-compete covenants will be invalid and unenforceable for employees whose “actual or expected” income is less than $ 75,000 per year (including salary, bonuses, commissions or any other). form of taxable compensation). This threshold will increase according to the following schedule:
- $ 80,000 as of January 1, 2027
- $ 85,000 on January 1, 2032
- $ 90,000 as of January 1, 2037
Perhaps in recognition of the fact that non-solicitation covenants are generally less onerous on employees than non-compete covenants, the monetary threshold for these arrangements is lower. Unsolicited covenants will be invalid and unenforceable for employees earning less than $ 45,000 per year (including salary, bonuses, commissions or any other form of taxable compensation). These numbers will increase as follows:
- $ 47,000 as of January 1, 2027
- $ 50,000 on January 1, 2032
- $ 52,000 as of January 1, 2037
Codify Fifield Require two years of employment for adequate consideration
As of 2013, Illinois employers have operated under the rule established by the Illinois Court of Appeals for the First District, First Division, in Eric Fifield and Enterprise Financial Group, Inc. v. Premier Dealer Services, Inc., 373 Ill. Dec. 379, 993 NE 2d 938 (Ill. App. Ct. 2013), requiring employers to provide employees with “at least two years or more of continuous employment” in return for signing a restrictive undertaking, if at – the job itself (as opposed to some other benefit) is the consideration for the agreement. the Fifield the decision is not without controversy: some courts refused to apply the two-year deadline Fifield to reign.
The new law will put an end to the controversy by codifying the Fifield two-year rule. If the employer does not provide “sufficient professional or financial benefits on its own” (that is to say, certain non-illusory benefits other than unlimited employment), then “sufficient consideration” is defined as “at least two years” of employment after the signing of the agreement.
Illinois employers should take note of this requirement before entrusting new employees with confidential information, trade secrets, or customer relationships.
Exclusion of certain employees affected by COVID-19 or similar circumstances
In addition to codifying some well-established common law principles, the new law will address a new concern. This will void the no-compete commitments (but not the unsolicited commitments) for employees laid off or terminated due to business circumstances or government orders related to COVID-19 or similar circumstances, unless the employee does not receive a base salary from the date of termination until the period of performance, less compensation earned during subsequent employment during the period of performance.
Judges have considered the impact of the COVID-19 pandemic on the weighting of injunction actions in restrictive covenant cases. The new law will remove the uncertainty about the application for employees who fall under the exclusion.
The new law contains important provisions for employers who intend to use and enforce restrictive covenants to protect their legitimate business interests. These include:
- Require employers to advise employees in writing to seek legal advice and to allow at least 14 calendar days to review a restrictive covenant before signing.
- Allow dominant employees to recover costs and reasonable attorney fees in civil actions brought by employers to enforce restrictive covenants.
- Prohibit non-compete covenants (but not unsolicited covenants) for those covered by a collective agreement under the Illinois Public Labor Relations Act or the Labor Relations Act in Illinois. Illinois education or those employed in construction. However, construction employees who primarily perform management, engineering or architectural, design or sales functions for the employer or who are a shareholder, partner or owner in any capacity of the employer may be covered by a non-competition or non-competition clause. solicit.
- Grant the Illinois Attorney General the right to initiate investigations and initiate or intervene in any civil action to compel compliance whenever the Attorney General has reasonable grounds to believe that an employer is is engaged in a pattern and practice prohibited by the new law. The Attorney General will have the power to subpoena to investigate potential violations and may request a court to impose civil penalties not exceeding $ 5,000 for each violation or $ 10,000 for each repeated violation within a period of time. five years. Each person who is the subject of an agreement in violation of the new law will constitute a separate and distinct violation.
- Codify the “blue pencil” doctrine, which allows a court to reform a restrictive covenant at its discretion. Statutory factors to consider would be the fairness of the restrictions as originally drafted, whether the original agreement reflects a good faith effort to protect a legitimate business interest, the extent of the reform, and whether the parties included a clause allowing modification in the agreement.
Given the “blue pencil” factor in the law, employers should consider including a provision in their restrictive covenants confirming that the parties allow judicial reform. The law still gives judges the flexibility to decide not to rewrite contracts that go too far.
Illinois employers should reassess their needs and consider revising agreements to accommodate new legal requirements. In addition, employers should continue to assess how they can further protect their legitimate business interests through other means, such as strengthening internal safeguards for sensitive information, preparing an exercise for outgoing employees and reviewing of the incoming employee due diligence process.
The date of entry into force of this new law is set for January 1, 2022. Two of its articles (limiting the use of non-competition clauses to employees earning at least $ 75,000 and non-solicitation clauses to earning employees at least $ 45,000) only apply to contracts entered into after January 1, 2022. However, their existence raises questions about the likelihood of performance of contracts with employees earning less than the threshold amounts before 2022.