On August 13, 2021, Governor Pritzker signed into law Public Act 102-0358, which amends the Illinois Freedom to Work Act and sets forth specific requirements for the enforceability of restrictive covenant agreements in Illinois for agreements entered into on or after January 1, 2022.
Income Thresholds
To be enforceable, as of the law's effective date, non-compete agreements may only be used with employees earning more than $75,000 per year, and more than $45,000 per year for non-solicit agreements. For purpose of this new law, "earnings" includes all salary, earned bonuses and commissions, and any amounts electively deferred by the employee, such as contributions to a 401(k) plan. In addition, for non-competes, the earnings threshold will increase to $80,000 in 2027, $85,000 in 2032, and $90,000 in 2037, and for non-solicits, the threshold will increase to $47,500 in 2027, $50,000 in 2030, and $52,500 in 2037.
Codification of Fifield Rule
As we previously discussed, Illinois courts have held that there must be at least two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant. Through Public Act 102-1358, Illinois codified the so-called Fifield Rule by defining adequate consideration to be either two years of employment post-execution of a restrictive covenant agreement or some other consideration, such as "additional professional or financial benefits." While such additional "benefits" remains undefined, presumably, a promotion, bonus, or other financial benefit will satisfy the adequate consideration requirement.
14 Day Notice Period
Similar to some other states, including Oregon and Massachusetts, Illinois will now require employers to provide a written copy of the restrictive covenant agreement to the employee 14 days prior to employment commencing and advise the employee to consult with an attorney.
Employee Right To Recover Attorneys' Fees
Regardless of whether the employment agreement allows the prevailing party the right to recover attorneys' fees, employees with agreements entered into after January 1, 2022, will now be able to "recover from the employer all costs and all reasonable attorney's fees" regarding any claim to enforce a covenant not to compete or covenant not to solicit.
Reformation Guidance
We previously cautioned that employers should not depend on Illinois to blue pencil or reform overly broad restrictive covenant agreements. That advice will not change. Public Act 102-0358 provides specific guidance discouraging "extensive" reformation and provides specific factors a court may consider regarding whether to reform, including "The fairness of the restraints as originally written" and "whether the original restriction reflects a good-faith effort to protect a legitimate business interest of the employer."
As a consequence of Public Act 102-0358, Illinois employers should promptly consult legal counsel to update their restrictive covenant agreements and hiring practices prior to January 1, 2022 to: (1) comply with the 14 day notice provision; (2) consider the strategy for ensuring adequate consideration; and (3) revising the scope of restrictive covenants to be no broader than necessary to provide the employer the best chance for enforcement (and to avoid paying an employee's legal fees in opposing any such action).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.