Governor Pritzker Signs New Law Changing the Game on Non-Compete Agreements

As we previously wrote about, this May the Illinois legislature passed a major bill that significantly alters how and when employers can use restrictive covenants, such as non-compete and non-solicitation agreements, with Illinois employees. As expected, Governor JB Pritzker signed the bill into law. It will go into effect January 1, 2022, and will only apply to agreements entered into after that date.

The new law amends the Illinois Freedom to Work Act and serves both to codify existing requirements under Illinois case law but also to impose new restrictions on Illinois employers as to when, with whom, and under what circumstances they may use restrictive covenants with employees. The goal of the new bill is to clarify when Illinois courts will and will not enforce non-compete and non-solicitation agreements.

The current version of the Freedom to Work Act defines a “covenant not to compete” as an agreement between an employer and a low-wage employee that restricts such low-wage employee from performing:

  • any work for another employer for a specified period of time;
  • any work in a specified geographical area; or
  • work for another employer that is similar to such low-wage employee’s work for the employer included as a party to the agreement.

The key aspect of this definition is that prohibited employers from entering into non-compete agreements with “low wage workers,” which is defined in the law effectively as any employee earning less than $13.00 per hour. The new law expands on this by prohibiting employers from entering into covenant not to competes with employees earning (or expected to earn) $75,000 or less per year. Further, employers may not enter into a non-solicitation agreement employees earning (or expected to earn) $45,000 or less per year. Beyond raising the earning threshold, the new law defines earnings more broadly than just salary. The calculation of an employee’s earnings will now include bonuses, commissions, and tips, as well as other benefits such as contributions to a 401(k) or to a flexible spending or health savings account.

Another noteworthy aspect of the new law is that it provides that non-compete agreements will be considered “void and illegal” if used with individuals (1) covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act or (2) employed in construction. Interestingly, the new law also prohibits the use of any restrictive covenants with “any employee who an employer terminates or furloughs or lays off as the result of business circumstances or governmental orders related to the COVID-19 pandemic,” or under circumstances similar to the pandemic. The new law does not provide any insight into what circumstances may be “related” to the pandemic and this question is likely to be left up to Illinois courts to determine in the future.

For both non-compete agreements and non-solicitation agreements, the earnings thresholds will increase every five years by a predetermined amount until January 1, 2037. Ultimately, after these increases, the minimum earnings threshold will be $90,000 for non-compete agreements and $52,500 for non-solicitation agreements.

The new law also outlines certain prerequisites to the enforceability of restrictive covenants. Under the new law, a covenant not to compete or a covenant not to solicit will be considered illegal and void unless (1) the employee receives adequate consideration, (2) the covenant is ancillary to a valid employment relationship, (3) the covenant is no greater than is required for the protection of a legitimate business interest of the employer, (4) the covenant does not impose undue hardship on the employee, and (5) the covenant is not injurious to the public. The law defines “adequate consideration” as either (1) the employee worked for the employer for at least two years after the employee signed a covenant not to compete or covenant not to solicit; or (2) “consideration adequate to support an agreement not to compete or not to solicit,” consisting of “a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.” These requirements and definitions likely will be familiar to restrictive covenant attorneys as they codify existing common law requirements created over the years by Illinois courts.

Given that the law does not go into effect until January 1, 2022, and applies only to restrictive covenants entered into after that date, this allows Illinois employers time to review their current restrictive covenant agreements and bring them into compliance before the start of next year. Engaging an experienced non-compete agreement and non-solicitation agreement attorney to assist in this review can help employers ensure that they will avoid potentially expensive litigation including the new law’s provision for requiring employers to pay the attorney’s fees and costs of employees who successfully challenge an employer’s restrictive covenant.

The Chicago and DuPage County non-compete agreement attorneys at Lubin Austermuehle concentrate on non-compete with over thirty-five years of experience defending and prosecuting non-compete agreements and unpaid wages and a wide variety of other business dispute lawsuits. Lubin Austermuehle, a firm of Chicago business dispute attorneys, handles litigation for individuals and businesses of all sizes, including small or closely held businesses for whom competition from an ex-employee can be a serious threat.

Super Lawyers named Illinois commercial law trial attorney Peter Lubin a Super Lawyer and Illinois business dispute attorney Patrick Austermuehle a Rising Star in the Categories of Class Action, Business Litigation, and Consumer Rights Litigation. Lubin Austermuehle’s Illinois business trial lawyers have over thirty years of experience in litigating complex class action, copyright, non-compete agreement, trademark and libel suits, consumer rights, and many different types of business and commercial litigation disputes. Our Oak Park and Elgin business dispute lawyers, civil litigation lawyers and copyright attorneys handle emergency business lawsuits involving copyrights, trademarks, injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, closely-held businesses and employee breaches of fiduciary duty. We also assist Chicago and Oak Brook area businesses and business owners who are victims of fraud. You can contact us by calling at 630-333-0333. You can also contact us online here.

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