7 Employer Takeaways on New Restrictive Covenant Law in Illinois

Illinois Gov. J.B. Pritzker recently signed a new law into effect that amends the Illinois Freedom to Work Act (IFWA) and creates greater obstacles for employers when it comes to the enforceability of restrictive covenants such as noncompetition and nonsolicitation agreements.

The new law, signed on Aug. 13 and taking effect on Jan. 1, 2022, will invariably impact any Illinois employer that either deploys such agreements already or contemplates implementing such agreements in the future. Because the new law only applies to agreements that are entered into on after Jan. 1, 2022, now is the time for employers to review and revise their restrictive covenant agreements.

Additionally, it is essential to begin planning for the transition to the new legal standards in 2022 and beyond.

Key Takeaways

Before the enactment of the new law, the validity of restrictive covenant agreements was largely governed by Illinois common law. The amended IFWA now contains a number of provisions that dramatically alter the legal standards relating to the enforceability of employee non-competition and non-solicitation covenants in the state of Illinois. Some of the new law's key provisions include: 

1. The law codifies certain judicial rulings relating to the adequacy of consideration in support of enforcement of noncompetition and nonsolicitation covenants. Under the new law, a restrictive covenant is supported by "adequate consideration" if (1) the employee has worked for the employer for at least two years after signing a restrictive covenant agreement, or (2) the employer has provided the employee with "professional or financial benefits" that may constitute independent consideration for entering into a restrictive covenant agreement. The law does not define precisely what amount of "professional or financial" benefits shall constitute adequate consideration.
2. A covenant not to compete is not valid or enforceable unless the employee's actual or expected annualized rate of earnings exceeds $75,000 per year, subject to additional increases in subsequent years.
3. A covenant not to solicit is not valid or enforceable unless the employee's actual or expected annualized rate of earnings exceeds $45,000 per year, subject to additional increases in subsequent years.
4. Employers are required to provide employees with at least 14 days to review a restrictive covenant agreement and decide whether to sign, although the employee has the option of signing the agreement before the 14-day period has ended. Employers must also advise employees that they have the right to consult with an attorney before entering into a restrictive covenant agreement. 
5. An employee can recover attorneys' fees and costs from an employer if the employee is the prevailing party in a civil action or arbitration filed by an employer to enforce noncompetition or nonsolicitation covenants. 
6. Noncompetition and nonsolicitation covenants are not enforceable against an employee who has lost their job due to COVID-19 or to "circumstances that are similar to the COVID-19 pandemic" unless enforcement of the restrictive covenant agreement includes the receipt of compensation equivalent to the employee's base salary at the time of termination for the period of enforcement, minus any compensation earned through subsequent employment. 
7. The new law provides the Illinois attorney general with broad authority to investigate employer conduct when there is "reasonable cause" to believe that an employer is engaged in a pattern or practice prohibited by the IFWA. The Illinois attorney general is permitted to seek compensatory damages and equitable remedies against employers, including monetary penalties of $5,000 per violation or $10,000 for each repeat violation within a five-year period. 

What Should Illinois Employers Do?

Significantly, the legal standards set forth in the new law do not apply to restrictive covenant agreements that are entered into prior to the effective date of the legislation, or Jan. 1, 2022. In other words, employers who have entered into legally enforceable agreements with their employees under the current state of the common law would be able to rely upon and enforce these agreements under the pre-existing—and less restrictive—legal standards. 

Accordingly, we recommend that you consider reviewing your existing restrictive covenant agreements to maximize the potential for enforcement in advance of Jan. 1, 2022. Further, you should begin planning for the changes that will become effective on Jan. 1, 2022. Employers who fail to do so will find they have practical and legal issues enforcing their future agreements. 

James M. Hux Jr. and Joel W. Rice are attorneys with Fisher Phillips in Chicago. © 2021 Fisher Phillips. All rights reserved. Reposted with permission.