Illinois Imposes Restrictions on Restrictive Covenants

By: Maryjo Pirages Reynolds,
Allen Galluzzo Hevrin Leake, LLC

On August 13, 2021, Governor Pritzker signed Senate Bill 0672 amending the Illinois Freedom to Work Act (820 ILCS 90/5 et seq.).  This legislation is significant for employers because it likely requires modification of existing restrictive covenant (non-compete and non-solicitation) agreement templates and may limit their use.  The legislation goes into effect on January 1, 2022, and it is not retroactive, meaning it does not impact any restrictive covenant agreements signed prior to the effective date.

As to non-compete provisions, the new law generally prohibits covenants not to compete unless the employee will earn in excess of $75,000.00 a year.  This threshold will increase to $80,000.00 in 2027, to $85,000.00 in 2032, and to $90,000.00 in 2037.  Essentially, Illinois law now limits the use of non-competes to high earners, with limited exceptions such as in connection with the purchase or sale of a business.

As to non-solicitation provisions, the new law generally prohibits covenants not to solicit unless the employee will earn in excess of $45,000.00 a year.  This threshold will increase to $47,500.00 in 2027, to $50,000.00 in 2032, and to $52,500.00 in 2037.

The new law also limits an employer from entering into a covenant not to compete or covenant not to solicit with any employee who was terminated, furloughed, or laid off as a result of COVID, unless the employee was fully compensated.  Additionally, it limits an employers’ ability to enter into restrictive covenants with employees subject to collective bargaining agreements, with limited exceptions.

Further, the legislation codifies existing elements of case law in that it states restrictive covenants are void unless the employer provides adequate consideration, the covenant is ancillary to an employment relationship, the covenant is no greater than required to protect a legitimate business interest, the covenant does not impose an undue hardship on the employee, and the covenant is not injurious to the public.  Notably, the new law defines “adequate consideration” as the employee has worked for the employer for at least 2 years after signing the covenant (see, the Fifield decision) or the employer otherwise provided additional professional or financial benefits.

The law also requires that an employer provide an employee with at least 14 days to consider the covenant and advise the employee of his or her right to consult with an attorney.  The law provides for attorneys’ fees if an employee prevails in contesting enforcement of a covenant.  It also permits blue-penciling, meaning it explicitly permits a court to make enforceable an otherwise unenforceable, overboard restrictive covenant.  However, employers should be careful not to over-rely on blue-penciling given the underlying requirement that a restrictive covenant should be no greater than that required to protect a legitimate business interest.  Finally, the Attorney General was provided authority to enforce the law in the face of violations, including the ability to request that a court impose $5,000.00-$10,000.00 penalties on employers for violations.

In summary, employers should proactively review and update their restrictive covenant agreement templates to anticipate the above requirements.  Employers with questions or concerns should consult with a member of our Labor and Employment Team – Jim Pirages, Eileen Caver, Evan Bonnett, or Maryjo Pirages Reynolds.