Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
In the last 10 years, states across the country have passed measures imposing new requirements and restrictions on employers wishing to use non-compete agreements with their workforces. In 2016, Illinois enacted the Freedom to Work Act (IFWA), which prohibits employers from entering into or enforcing non-compete agreements with employees deemed “low-wage.” Now five years on from the IFWA, Illinois has come back to the table to codify additional requirements for restrictive covenant enforcement and use in line with the national trend.
On May 31, 2021, the Illinois legislature passed SB672, which Governor Pritzker signed into law on August 13, 2021. SB672 makes sweeping amendments to the IFWA in several key ways. The 2016 IFWA — just 200 words — prohibits employers from entering into non-compete agreements with “low-wage” employees, defined under that law as employees earning less than (a) the greater of the applicable minimum wage under local, state, or federal law; or (b) $13.00 per hour. Among other things, SB672 significantly modifies and augments this threshold, imposes new restrictions on employers as it relates to their use of non-compete and non-solicitation agreements (non-solicitation agreement requirements were not codified through the old IFWA), clarifies requirements governing the enforceability of non-compete and non-solicitation agreements, and imposes possible liability on employers that seek to enforce non-compete and non-solicitation agreements deemed unenforceable.
What Changes Does the Amended IFWA Make?
First, SB672 — effective January 1, 2022 — (a) greatly increases the annual amount an employer must pay an employee to impose enforceable non-compete restrictions; and (b) for the first time, includes income threshold requirements for employee and business non-solicitation agreements.1 Specifically, SB672 prospectively voids non-compete agreements between employers and employees if employees earn $75,000 per year or less. This threshold increases to $80,000 in 2027, $85,000 in 2032, and $90,000 in 2037. Similarly, SB672 prospectively voids non-solicitation agreements for employees earning $45,000 per year or less. This amount increases to $47,500 in 2027, $50,000 in 2032, and $52,500 in 2037.
Second, SB672 imposes specific notice requirements on employers. A non-solicitation or non-compete agreement will be enforceable in Illinois only if (a) the employer advises the employee in writing to consult with an attorney before entering into the covenant; and (b) the employer provides the employee with a copy of the covenant at least 14 calendar days before the commencement of the employee’s employment or the employer provides the employee with at least 14 calendar days to review the covenant. An employee may waive this 14-day requirement by signing before the expiration of those 14 days.
Third, and most significant, SB672 codifies Illinois case law regarding the reasonableness of non-solicit and non-compete agreement provisions, providing that non-compete and non-solicitation agreements are void and unenforceable unless:
- The employee receives “adequate consideration,” defined as (1) employment with the employer for at least two years after execution of the agreement; or (2) consideration otherwise “adequate to support an agreement to not compete or to not solicit, which consideration can consist of a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.”
- The covenant is ancillary to a valid employment relationship.
- The covenant is not greater than what is required to protect the employer’s legitimate business interest.
- The covenant does not place unwarranted hardship on the employee.
- The covenant is not detrimental to the public.
By specifically requiring two years of continued employment in the absence of any other independent consideration, SB672 codifies the Illinois Appellate Court's (First District) holding in Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327. The other requirements set forth above similarly track and serve to codify several Illinois court-based holdings and analyses governing the enforceability of restrictive covenants. For instance, SB672 also defines the term “legitimate business interests” and specifies that a “legitimate” interest must be analyzed under the “totality of the circumstances of the individual case.” This requirement comes from several Illinois court rulings, including the seminal case Reliable Fire Equipment Company v. Arredondo, 2011 IL 111871.
Fourth, SB672 renders void and unenforceable a non-compete agreement for an employee whose job was terminated or furloughed due to circumstances “related to the COVID-19 pandemic, or under circumstances similar to COVID-19.”
Fifth, SB672 imposes possible liability or the risk of litigation or investigations on employers that seek to enforce unenforceable non-compete or non-solicitation provisions. Specifically:
- An employee who successfully defends against an action to enforce a non-compete or non-solicitation agreement “shall” recover “all costs and all reasonable attorney’s fees” incurred in defending against such claim, in addition to any other “appropriate relief” the court or an arbitrator may award.
- SB672 gives the Illinois attorney general the statutory right to initiate an action or intervene in any action involving an employer deemed to have engaged in a “pattern or practice” of conduct violating SB672’s requirements. The attorney general may also conduct a pre-suit investigation and will have broad discovery rights in the course of that investigation.
- In bringing an enforcement action, the attorney general may seek and obtain “monetary damages to the State, restitution, and equitable relief.” The attorney general may also ask that a court impose a civil penalty “not to exceed $5,000 for each violation or $10,000 for each repeat violation within a 5-year period.”
Employers are encouraged to speak with counsel ahead of the law’s January 1, 2022 effective date. Littler’s Unfair Competition and Trade Secrets practice group will continue to monitor changes to the law in Illinois, and across the country, as more non-compete legislation is introduced at the state and national level.
1 SB672 defines a non-solicitation agreement or “covenant not to solicit” as one that “(1) restricts the employee from soliciting for employment the employer’s employees or (2) restricts the employee from soliciting, for the purpose of selling products or services of any kind to, or from interfering with the employer’s relationships with the employer's clients, prospective clients, vendors, prospective vendors, suppliers, prospective suppliers, or other business relationships.” SB672 defines a non-compete agreement or “covenant not to compete” as an agreement that either (a) “by its terms imposes adverse financial consequences on the former employee if the employee engages in competitive activities after the termination of the employee's employment with the employer” or (b) an agreement that restricts (1) “any work for another employer for a specified period of time”; (2) any work in a specified geographical area; or (3) work for another employer that is similar to such low-wage employee's work for the employer included as a party to the agreement.”