NEW ILLINOIS LIMITATIONS ON NON-COMPETE AGREEMENTS TO BECOME EFFECTIVE JANUARY 1, 2022

Illinois joins a growing list of jurisdictions, including California, District of Columbia, Maryland, Massachusetts, Oregon, Rhode Island, Virginia and the State of Washington, that have recently passed legislation limiting or outlawing restrictive employee non-competition and non-solicitation covenants. There is also a new push at the federal level to all but bar non-competition agreements, except under certain circumstances involving the sale of a business or dissolution of a partnership.

On August 13, 2021, Illinois Governor Pritzker signed into law a bill amending the Illinois Freedom to Work Act, which governs restrictive covenants and non-competition agreements. The amendments include certain limitations on the enforceability of non-compete agreements and contain severe penalties for employers who fail to comply with these regulations, which become effective on January 1, 2022, and will not apply retroactively. This legislation’s new limitations to non-compete agreements and potential penalties to employers include the following:

Salary Thresholds for Restrictive Covenants:

• The Bill prohibits non-competition agreements with employees earning $75,000 or less.
• It also prohibits non-solicitation covenants with employees earning $45,000 or less.
• These annualized earning thresholds increase periodically beginning in 2027.

Consideration Requirements for Non-Competition Agreements permitted under the legislation:

• The legislation codifies the two-year Fifield consideration rule, first established in Fifield v. Premier Dealer Services, Inc., which held that continued employment is not sufficient consideration for a restrictive covenant unless the employee remains employed for at least two years.
• Under the new legislation, a restrictive covenant is supported by “adequate consideration” if (1) the employee worked for the employer for at least two years after signing a restrictive covenant agreement (i.e. satisfies the Fifield rule), or (2) the employer otherwise provided consideration adequate to support the restrictive covenant agreement, “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 legislation does not provide additional guidance on what “professional or financial benefits” are sufficient to be considered adequate consideration.
• In addition to the consideration requirements, the legislation also requires employers to advise the employee in writing to consult with an attorney before entering into the agreement and to provide the employee at least 14 calendar days to review the agreement before signing it.

Potential Penalties to Employers for Non-Compliance:

• The legislation creates mandatory attorneys’ fees rights for an employee who prevails against an employer unsuccessfully attempting to enforce noncompliant restrictive covenants.
• Authorizes the Illinois Attorney General to investigate any patterns and practices that violate the legislation. The Illinois Attorney General may impose a civil penalty of $5,000 per violation or $10,000 for each repeat violation within a 5-year period.

These new regulations will not apply retroactively to existing and executed restrictive covenant agreements. However, Illinois employers will want to carefully revisit their non-compete and non-solicitation agreements in light of these new forthcoming regulations to ensure that future restrictive covenant agreements will be enforceable. In doing so employers should also be mindful that while the law codifies the “blue pencil” doctrine, which permits the reformation of restrictive covenants by the court, the law also places the decision on whether reformation is appropriate within the judgment of the court based on several somewhat vague statutory factors.

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