On August 13, 2021, Governor Pritzker signed a new law regulating restrictive covenants in employment contracts involving Illinois employees, which will come into effect on January 1, 2022. The relevant restrictive covenants are (i) non-competition (eg, provisions that restrict a current or former employee from engaging in competitive activities after employment); and (ii) non-solicitation provisions (for example, provisions that prohibit an employee from hiring the employer’s employees or restrict the employee to soliciting current or potential patients or clients of the employer, referral sources or other persons with whom the employer has or attempted to establish business relationships during the employee’s employment).
Prior to the enactment of this new law, the validity of restrictive covenants was strictly decided by the courts without any legislative guidance. The new law adopts many of the principles established by the courts, but more importantly adds a number of new guidelines that employers must follow if they wish to enforce restrictive covenants.
The following table identifies the changes enacted by the new law:
|Before January 1, 2022||As of January 1, 2022|
|Non-compete clauses are not limited by the amount of an employee’s compensation||Non-compete clauses will not apply against employees earning the following compensation (which includes bonuses and all sources of taxable income from employment):
Year 2022 – $ 75,000 or less
Year 2027 – $ 80,000 or less
Year 2032 – $ 85,000 or less
Year 2037 – $ 90,000 or less
|Non-solicitation provisions are not limited by the amount of employee compensation||The non-solicitation provisions will not be enforced against employees earning the following compensation (which includes bonuses and all sources of taxable income from employment):
Year 2022 – $ 45,000 or less
Year 2027 – $ 47,500 or less
Year 2032 – $ 50,000 or less
Year 2037 – $ 52,500 or less
|Non-compete covenants and non-solicitation restrictions are not limited by COVID-19||Non-competition and non-solicitation clauses will not be enforced against employees who have been terminated due to COVID-19 or “circumstances similar to the COVID-19 pandemic” unless the application of the commitment not to compete does not include (i) compensation equivalent to the employee’s base salary at the time of termination for the period of performance; minus (ii) remuneration earned in subsequent employment during the performance period|
|The non-competition and non-solicitation clauses may possibly be enforceable against employees covered by a collective agreement.||Non-competition or non-solicitation clauses will not be enforced against employees covered by a collective agreement under (i) the Illinois Public Labor Relations Act; or (ii) the Illinois Educational Labor Relations Act. In addition, these restrictions will not be applied to persons employed in construction (other than construction employees who primarily perform management, engineering or architectural, design or sales functions for the employer or who are shareholders, partners or owners of the employer)|
|No mandatory review period||Employers must give employees 14 days to review non-competition and non-solicitation clauses, although employees can voluntarily waive the 14-day review period|
|No obligation to inform employees of the right to consult a lawyer||Employers Should Inform Employees of Their Right to Seek Legal Advice Regarding Restrictive Covenants|
|No specific oversight of non-compete and non-solicitation clauses by the Illinois Attorney General||
The Illinois attorney general’s office must oversee non-competition and non-solicitation clauses and take action against employers who violate the new law.
The Attorney General is authorized to seek compensatory or equitable remedies against employers, or to seek civil penalties of $ 5,000 per violation or $ 10,000 for each repeated violation within a five-year period.
|No statutory right of employees to obtain attorney fees in the event that an employer takes legal action to enforce a non-competition or non-solicitation clause||An employee can recover legal fees and costs from the employer if he or she is the winning party in a legal action to enforce a non-competition or non-solicitation clause.|
|Many Illinois courts have required employers to prove that in addition to job retention, “adequate consideration” was provided for non-competition and non-solicitation clauses as a condition for employment. application of these provisions.||
The new law formally adopts the retention in court decisions that requires “adequate consideration” to support the application of non-competition and non-solicitation clauses.
– the employee has worked for the employer for at least two years after the employee has signed the non-competition or non-solicitation commitment;
– the employer has also provided sufficient consideration to support a non-competition or non-solicitation clause, which consideration may consist of a period of employment plus additional professional or financial benefits; Where
– the employer has also provided additional professional or financial benefits to the employee
|Most courts have used a “set of circumstances” approach to determine whether to apply non-competition and non-solicitation clauses.||
The new law requires courts to use a “totality of the circumstances” analysis to determine whether to apply the terms of a non-compete or non-solicitation covenant, and to consider factors such as :
– employee exposure to the employer’s clients or patients;
– the virtual permanence of the employer’s relationship with its clients or patients;
– the use or acquisition by the employee of confidential information from the employer;
– the duration of the time restrictions implied by the provisions;
– the extent of any geographical restrictions in the provisions; and
– the scope of activities being limited
The new law has no impact on the following situations:
- Non-compete and non-solicitation clauses entered into by the parties before January 1, 2022. We currently understand that any non-competition or non-solicitation clauses that were in agreements entered into before January 1, 2022 will not be subject to the new law, even if the duration of these agreements extends beyond January 1, 2022;
- Non-competition or non-solicitation clauses arising from the sale of a business, the sale of an interest in a business or the sale of the “goodwill” of a business;
- Confidentiality agreements or provisions, or provisions relating to the disclosure, sale or assignment of trade secrets or inventions;
- Restrictive covenants preventing competition and solicitation during notice periods in agreements that require notice of termination, and the employee remains employed and receives compensation during that notice period; and
- Provisions prohibiting an employee from re-applying for employment after termination of employment.
The new law leaves many questions unanswered, including: What type and amount of “professional or financial benefits” is an adequate consideration for the application of restrictive covenants? Will restrictive covenants entered into before January 1, 2022 be exempt from the new law if they are renewed or amended after January 1, 2022? Does the new law apply to a restrictive covenant in an employment contract signed in 2021 for a job starting in 2022? Will employers be able to enforce the terms of the agreement allowing them to recover their fees and expenses from employees if employers prevail in a restrictive covenant dispute?
These new legal requirements will impact your business and make it more difficult to find and enforce restrictive covenants in Illinois. Now is the time to consider what needs to be included in labor agreements to be concluded after January 1, 2022, and how agreements currently in force might be affected.