Starting January 1, 2022, employers in Chicago and throughout Illinois will have to deal with significant new hurdles to make sure employment agreements with covenants not to compete or non-solicitation terms are valid and enforceable.
When Does The New Law Go Into Effect?
On August 13, 2021, Illinois Governor JB Pritzker signed into law Senate Bill 672, which amended the Illinois Freedom to Work Act, 820 ILCS 90/1 et seq. (the “Act”). The amendments impose many new restrictions that significantly change the landscape for restrictive covenants entered into between an employer and employee in Chicago and throughout Illinois. The amendments apply to agreements with an effective date on or after January 1, 2022. The amendments do not apply to existing agreements containing restrictive covenants, or to any agreements that have an effective date of December 31, 2021 or earlier. SB 672 amends Section 5 and 10 of the Act and adds new Sections 7, 15, 20, 25, 30, 35, and 97.
Which Employees Are Covered By The New Law?
When originally enacted in 2017, the Act only prohibited employers from imposing restrictive covenants on “low-wage employees”, who were defined as any employee earning less than (1) the applicable minimum wage, or (2) $13.00 per hour, whichever was greater. SB 672 changed all of that.
SB 672 eliminates the term “low-wage employees” and instead expands the pool of employees subject to the law. Specifically, Section 10 of the Act will state that “no employer shall enter into a covenant not to compete with any employee unless the employee’s actual or expected annualized rate of earnings exceeds $75,000 per year.” This amount increases to $80,000 per year starting January 1, 2027, and goes up to $85,000 per year on January 1, 2032 and $90,000 on January 1, 2037. Any covenant not to compete entered into in violation of this new law is specifically “void and unenforceable” under the new law.
For non-solicitation agreements, that annual threshold is $45,000 starting January 1, 2022. It then goes up by $2,500 every five years.
Section 10(D) of the new law specifically states that it does not apply to construction employees who primarily perform management, engineering or architectural, design, or sales functions for the employer or who are owners in any capacity of the employer.
What Type of Contracts Does It Apply to?
The amendment applies to covenants not to compete and covenants not to solicit employees and customers that are part of an employment agreement. But it does not apply to confidentiality agreements or contracts that deal with trade secrets or inventions assignment agreements. In addition, it does not apply to covenants not to compete that are part of an agreement to sell a business.
Other Key Points of the New Law:
Other key provisions of the new law include:
- Requiring employers to advise employees in writing to consult with an attorney before agreeing to a restrictive covenant, and allowing the employee 14 days to review the proposed restriction.
- Under Section 5, there must be “adequate consideration” to support the inclusion of a non-compete or non-solicitation provision in an employment agreement, such as evidence that (a) the employee worked for the employer for two years after signing the agreement, or (b) the employer otherwise provided the employee with “a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.” What type or amount of “professional or financial benefits” is not explained in the new law.
- Prohibiting employers from enforcing any non-compete or non-solicitation covenant against an employee who is furloughed, terminated, or laid off as “the result of business circumstances or governmental orders related to the COVID-19 pandemic or under circumstances that are similar to the COVID-19 pandemic[.]”
- Allowing employees to recover attorneys’ fees and costs if their employee tries unsuccessfully to enforce an invalid non-compete or non-solicitation agreement in court or arbitration.
Certainly, many employers will be unaware of these changes that take effect January 1, 2022. The consequences of not being ready can be costly. Employers should review their existing agreements and begin to consider making timely adjustments to ring in the New Year. Otherwise, employers could be inviting costly litigation under this new law.
DeBlasio & Gower LLC’s founding member, Attorney Antonio DeBlasio, has served clients in the Chicago are for 27 years. He has been selected by Super Lawyers® for Business Litigation in 2008 and in each year from 2014 through 2021. Only 5% of attorneys in Illinois receive this distinction. Contact Mr. DeBlasio at (630) 560-1124 or via our website, www.dgllc.net to schedule a consultation regarding your covenant not to compete and non-solicitation agreement case.