Illinois Ushers In New Restrictions on Non-competes and Non-solicits

On the heels of the bi-partisan introduction of the Workforce Mobility Act[1] in Congress in February 2021, on May 31, 2021, the Illinois General Assembly passed amendments to the Illinois Freedom to Work Act (the “Amendments”) that aim to impose significant new restrictions on employee non-compete and non-solicit agreements in Illinois. While the federal Workforce Mobility Act would essentially bar non-compete agreements except for in sale of business or partnership dissolution context, the Amendments, similar to laws passed in other states, would leave non-competes in place in general, but would pare back their application in several key respects. Illinois Governor J.B. Pritzker is expected to sign the Amendments into law. If that occurs, the Amendments would take effect on January 1, 2022. The passage of the Amendments marks another point in the ongoing trend of jurisdictions enacting legislation that limits the use of non-competes and non-solicits with employees.

Key Considerations for the Amendments

Effective Date

The new restrictions in the Amendments will not be retroactive. Instead, they apply to all non-competes and non-solicits entered on or after January 1, 2022.

Covered Agreements

The Amendments will apply to all agreements with employees that contain non-competes, non-solicits of employees, or non-solicits of customers. Specifically, the Amendments define those agreements as follows:

• Non-compete agreements are agreements between an employer and an employee that restrict the employee from performing:
  
  • Any work for another employer for a specified period of time;
  • Any work in a specified geographical area;
  • Work for another employer that is similar to the employee’s work for the employer; or
  • Forfeiture-for-competition agreements, which do not prohibit employees from competing against the employer, but impose financial consequences on employees to provide a disincentive for competing against their employer.
• Non-solicits are agreements between an employer and an employee that restrict the employee from:
  
  • Soliciting for employment the employer’s employees; or
  • Soliciting, for the purpose of selling products or services of any kind to or interfering with the employer’s relationships with, the employer’s clients, prospective clients, vendors, prospective vendors, suppliers, prospective suppliers, or other business relationships.

The Amendments do not apply to the following types of restrictions:

• Non-competes and non-solicits that are entered in the sale of the business context that are unrelated to employment.
• Confidentiality agreements, agreements prohibiting the use or disclosure of trade secrets, or intellectual property or invention assignment agreements.
• Garden leave provisions, where the employee receives advance notice of termination, during which notice the employee continues to be employed and paid by the employer.
• Provisions prohibiting employees from reapplying for employment with the employer after they are terminated.

Employees Who Cannot Enter Non-competes and Non-solicits

In 2016, Illinois passed a law prohibiting non-compete agreements for employees earning $13 per hour or less. Now, the Amendments seek to increase that threshold to ban non-competes for employees earning less than $75,000 annually. This amount increases by $5,000 every five years until 2037. The Amendments also add a monetary threshold for non-solicits, prohibiting those agreements for employees earning less than $45,000 annually. The non-solicit threshold increases by $2,500 every five years until 2037. These monetary thresholds will be based on employee annualized earnings, which includes all W-2 taxable compensation (e.g., salary, bonus, tips, etc.) as well as elective deferrals not reflected on W-2 earnings, such as employee contributions to 401(k) and 403(b) plans, flexible spending accounts, health saving accounts, and commuter benefits.

The Amendments also prohibit non-competes and non-solicits with any employees covered by a collective bargaining agreement under the Illinois Public Labor Relations Act, the Illinois Educational Labor Relations Act, and individuals in the construction industry, except for construction employees who perform management, engineering, or architectural, design, or sales functions, or who are owners in any capacity for those employers.

Enforceability Considerations

The Amendments will make non-competes and non-solicits illegal and void unless they meet each of the following requirements:

• The employee receives adequate consideration;
• The covenant is ancillary to a valid employment relationship;
• The covenant is no greater than is required for the protection of a legitimate business interest of the employer;
• The covenant does not impose undue hardship on the employee; and
• The covenant is not injurious to the public.

New “Adequate Consideration” Requirements

What qualifies as sufficient consideration to support a non-compete agreement in Illinois has been unsettled for several years, since the Illinois Court of Appeals decision in Fifield v. Premier Dealer Services, Inc. In Fifield, the court found employers must offer more than at-will employment, such as a cash bonus or guaranteed employment for two years, to provide sufficient consideration to support a non-compete agreement under Illinois law. Since Fifield, courts addressing the issue have reached mixed results, with most courts finding at-will employment sufficient to support a non-compete under Illinois law.

The Amendments have adopted Fifield’s rationale, finding that the “adequate consideration” needed to support a non-compete or non-solicit agreement requires the employer to either:

• Offer at least two years of at-will employment after the employee signs the agreement;
• A period of employment “plus additional professional or financial benefits”; or
• Professional or financial benefits.

The Amendments do not address what types of consideration will qualify as “professional or financial benefits.”

Limitations for COVID-19 Separations

The Amendments also prohibit employers from enforcing non-compete and non-solicit agreements against employees who are terminated, furloughed, or laid-off due to the COVID-19 pandemic or circumstances “similar to the COVID-19 pandemic,” unless the employee is paid the same base salary at the time of termination for the entire restricted period. The base salary requirement can be reduced by earnings the employee receives from another employer. The Amendments do not define the types of circumstances that are “similar to the COVID-19 pandemic.”

New Procedures for Entering Agreements

The Amendments will require employers, before entering non-competes and non-solicits with employees, to:

• Provide at least 14 calendar days to review the restrictions, although employees can elect to sign them before that period; and
• Inform employees in writing that they can consult with an attorney before entering the agreement.

Failure to satisfy either of these requirements will be fatal to enforcement.

Factors for Legitimate Business Interest

Under current Illinois precedent, employers must demonstrate a legitimate business interest to support enforcement of an employee non-compete or non-solicit. The Amendments now codify a non-exhaustive list of factors courts should consider when determining whether non-competes and non-solicits are reasonably necessary to protect an employer’s legitimate business interests. The list of non-dispositive factors includes:

• The employee’s exposure to the employer’s customer relationships or other employees;
• The near-permanence of customer relationships;
• The employee’s acquisition, use, or knowledge of confidential information through the employee’s employment;
• The time restrictions (i.e., the longer an employee is subject to the restrictions, the more likely a reviewing court will find them unreasonable);
• The geographic restrictions (i.e., if an employee’s sales territory is Illinois, and a customer non-solicit applies to any customer of the employer anywhere in the world, regardless of whether the employee worked for or knew about that customer, a court may find that unreasonable); and
• The scope of the activity restrictions.

No factor carries more weight than another. Instead, the Amendments state that the importance of a factor depends on the specific facts and circumstance of the case.

Judicial Reformation

Although under current Illinois precedent courts have discretion to reform or blue pencil overbroad non-competes and non-solicits, the Amendments now include a list of non-dispositive, discretionary factors that courts may consider when deciding whether to reform or blue pencil non-competes or non-solicits to make them enforceable. The factors include:

• Fairness of the restraints as originally written;
• Whether the restriction reflects a good-faith effort to protect the employer’s legitimate business interest;
• The extent of the reformation; and
• Whether the agreement includes a clause authorizing such modifications.

Recovery of Attorneys’ Fees

The Amendments allow an employee to recover costs and reasonable attorneys’ fees if the employee prevails on any claims filed by the employer, whether in court or arbitration, to enforce non-competes or non-solicits. It is important to note that this is not a prevailing-party standard. So employers will be unable to recover their attorneys’ fees under the Amendments, unless their non-compete or non-solicit contains a contractual attorneys’ fees provision that allows the employer to recover its fees.

Enforcement

The Illinois Attorney General may also pursue investigations and enforcement actions against any person or entity that has engaged “in a pattern and practice” prohibited by the Amendments, including intervening in a civil action. If successful, the Attorney General may obtain monetary damages for Illinois, equitable relief, and/or civil penalties of up to $5,000 for each violation or $10,000 for each repeat violation within a five-year period. Civil penalties apply to each agreement that violates the Amendments, so penalties can add up quickly.

Practical Implications of the Amendments

Employers with employees or operations in Illinois should review their non-compete and non-solicit agreements and practices in light of the Amendments. Because the Amendments will only apply to non-competes and non-solicits entered on or after January 1, 2022, employers should consider having current employees in Illinois sign new or updated non-competes and non-solicits this year to avoid those agreements being subject to the Amendments.

Employers should also review their form agreements before having employees enter non-competes and non-solicits governed by Illinois law next year. This includes reviewing all forms that contain non-compete and non-solicit provisions, including offer letters, employment agreements, and equity incentive plans that may have forfeiture-for-competition provisions, to ensure that those agreements:

• Advise employees of their right to consult with an attorney;
• Authorize courts to reform the agreement;
• Document that employees and new hires had at least 14 calendar days to review the agreement before entering it, although they can voluntarily choose to sign it sooner; and
• Document the “adequate consideration” employees received to support the restrictions.

Employers will also need to review their practices for issuing and updating agreements with non-competes and non-solicits governed by Illinois law. This includes:

• Building in the 14-day review period before requiring current employees or new hires to sign non-competes and non-solicits;
• Creating processes for determining when an employee’s total W-2 earnings are below the monetary thresholds in the Amendments, including updating those monetary thresholds every five years to ensure employees falling below the threshold are no longer covered by the agreements;
• Ensuring that non-competes and non-solicits are not enforced against employees who are terminated due to the COVID-19 pandemic, or choosing to pay the employee his or her base salary during the restriction period; and
• Determining what “adequate consideration” will be offered to support the agreement.

Special attention should be given to what “adequate consideration” employers will offer employees entering non-competes and non-solicits. For good reason, employers should be cautious about promising employment for at least two years since it impacts the at-will status of employees. But what “professional or financial benefits” will qualify as “adequate consideration” remains unclear. Some type of monetary payment will likely suffice, such as a signing bonus, annual bonus, merit increase, and similar payments. Any cash payments should be more than a de minimis amount, but how much employers must provide is still an open question. It is also unclear whether non-monetary consideration will suffice, such as a promotion or access to confidential information.

Employers should be mindful that failure to comply with the Amendments could result in investigations or enforcement actions by the Illinois Attorney General where it has “reasonable cause” to believe that an employer is engaged in a “pattern or practice” of using non-competes or non-solicits in violation of the Amendments. Those actions can also come with significant penalties for employers that have numerous employees subject to restrictions in violation of the Amendments.

The Amendments Add to the Trend of States Limiting Non-competes and Non-solicits

The Amendments add to the growing trend of states enacting laws that place limits on the enforceability of employee non-competes and non-solicits. The Illinois legislature, however, appears to have taken a middle-ground approach, recognizing the importance of non-competes and non-solicits for employers to restrict higher-earning employees from unfairly competing, while trying to balance the hardship those agreements can have on employees.

On the one hand, the Amendments do not go quite as far as some jurisdictions, like California and the District of Columbia, which have outlawed employee non-competes except in limited circumstances. Nor does it join jurisdictions, like Washington and Massachusetts, that require non-competes with employees in their states to use their state law and forum or that contemplate garden leave payments for layoffs or terminations without cause. On the other hand, the Amendments go beyond states, such as Maryland and Virginia, that have enacted laws merely prohibiting non-competes for low-wage workers.

The Illinois legislature also addressed issues that have been largely absent from the recent trend of restricting non-competes. Unlike some jurisdictions, such as Massachusetts, Washington, and Oregon, that have expressly carved out non-solicits from their restrictions, the Illinois legislature expressly included non-solicits under the Amendments. Although courts across the country have increasingly recognized the importance of restrictive covenants in the context of the pandemic and remote work,[2] Illinois appears to be the first state to specifically address COVID-19 in its restrictive covenant statute amendments. Whether other state legislatures will similarly incorporate COVID-19 or similar pandemic considerations into any future restrictive covenant legislation is unclear. 

Given the continuing trend of states enacting laws limiting the use of non-competes and non-solicits, employers should continue to monitor new developments. As legislatures in other jurisdictions consider legislation on non-competes and non-solicits, it remains to be seen whether Illinois will create a model for those jurisdictions. The future of the Workforce Mobility Act is also an open question. But, what is clear is that despite the legislative developments at the state and federal level and the various calls for uniformity in the area of restrictive covenants, companies with intrastate operations and employees in the U.S. continue to face a patchwork of legal standards and differing levels of restrictive covenant enforceability.

Morrison & Foerster summer associate Aaron Altman contributed to the writing of this alert.

[1] Workforce Mobility Act

[2] See, e.g., Adecco USA, Inc. v. Staffworks, Inc., No. 620CV744MADTWD, 2020 WL 7028872, at *21 (N.D.N.Y. Sept. 15, 2020) (“In ordinary circumstances, the equities might weigh in Plaintiffs’ favor. However, enforcement of the non-compete agreements will force Defendants Standford, Rohde, Gloria, Flint, and Fravel out of work in a time when the COVID-19 pandemic has made employment opportunities scarce.”); Yellowstone Landscape v. Fuentes, No. CV 4:20-1778, 2020 WL 4547150, at *8 (S.D. Tex. Aug. 6, 2020) (denying PI: “Defendant will lose his job and be out of work in the middle of a pandemic if an injunction is granted . . . . Defendant and his family would suffer significant hardship if he were unemployed, particularly under present circumstances.”); Schuylkill Valley Sports, Inc. v. Corp. Images Co., No. 5:20-CV-02332, 2020 WL 3167636, at *17 (E.D. Pa. June 15, 2020) (denying PI: “The harm to Snyder if an injunction is granted is great as he will once again be without a job and income. Although the stay-at-home orders issued by the Governor of the Commonwealth of Pennsylvania ended on June 4, 2020, not all businesses are open.”).