Amendment to the Illinois Freedom to Work Act Imposes Significant Restrictions on Non-Competition and Non-Solicitation Agreements

On January 1, 2022, a new amendment to the Illinois Freedom to Work Act went into effect that significantly alters the restrictive covenant landscape in Illinois.

The Act previously prohibited employers from entering into non-competes with “low-wage employees” making less than $13 per hour. The amendment eliminates that language, and now prohibits employers from entering into non-competition agreements with employees making less than $75,000 per year, and from entering into non-solicitation agreements with employees making less than $45,000 per year, with these thresholds rising every 5 years in 2027, 2032 and 2037. 820 ILCS 90/10(a), (b). Since the average salary in Illinois is less than $75,000, the Act now applies to the majority of Illinois employees.

The amendment imposes two other prohibitions on restrictive covenants. It prohibits employers from entering into non-competition or non-solicitation agreements with employees terminated or furloughed or laid off “as the result of business circumstances or governmental orders related to the COVID-19 pandemic” or similar circumstances, unless the employee is compensated at their base salary during the period of enforcement less their subsequent earnings. Id. § 10(c). The amendment further prohibits non-competition agreements with certain public and educational employees (who are covered by collective bargaining agreements under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act) and certain construction workers (who do not work in management, engineering, architecture, design or sales, and are not owners of the business). Id. § 10(d).

The amendment also contains provisions regarding employer notice, fee recovery for prevailing employees, and oversight by the Illinois Attorney General. Employers are required to advise employees, in writing, to consult with an attorney before entering into a non-competition or non-solicitation agreement, and they must provide employees with the restrictive covenant at least 14 days before beginning employment or signing it. Id. § 20. Employees who prevail in an employer’s action to enforce a non-compete or non-solicit agreement are now statutorily entitled to recover their costs and reasonable attorney’s fees. Id. § 25. The Illinois Attorney General is authorized to investigate and take action against employers who regularly violate the Act. Id. § 30.

In addition, the amendment codifies existing Illinois restrictive covenant law in several respects. An agreement not to compete or solicit (1) must be supported by adequate consideration, (2) must be ancillary to a valid employment relationship, (3) can be no greater than required to protect legitimate business interests, (4) cannot impose undue hardship on the employee and (5) cannot be injurious to the public. Id. § 15. Regarding the first element, the amendment codifies the rule in Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327 that continued employment, by itself, is only adequate consideration for a covenant not to compete or solicit if the employee worked for the employer “for at least 2 years” after signing the agreement containing the covenant. 820 ILCS 90/5. Regarding the third element, the amendment adopts the rule in Reliable Fire Equipment Co. v. Arredondo, 965 N.E.2d 393 (Ill. 2011) that whether a covenant protects legitimate business interests is determined by “the totality of the facts and circumstances” of each case. 820 ILCS 90/7. The amendment recognizes that courts may reform (i.e., blue pencil) overbroad covenants, id. § 35(b), but cautions that “extensive judicial reformation” may be against public policy and discourages courts from “wholly rewriting” contracts. Id. § 35(a).

Finally, the amendment explicitly recognizes two limitations on its application. First, it only applies to agreements “entered into after the effective date” of the amendment (i.e., January 1, 2022) and is not retroactive. Id. § 5. Second, it does not apply to other types of restrictive covenants, such as those regarding confidentiality, non-use or non-disclosure of trade secrets, or assignment of inventions, and it does not apply to covenants made in connection with the sale of a business, garden-leave agreements, or agreements not to reapply to the employer. Id.

Employers and employees should be mindful of this new law and ensure that they comply with its requirements when entering into future non-competition and non-solicitation agreements.

Sarah E. Finch and Nick Kahlon are litigators at Riley Safer Holmes & Cancila, LLP in Chicago.