Covenants not to compete and non-solicitation agreements impose restrictions on what an employee can do after their employment with a company ends (either voluntarily or involuntarily).
If you have been asked to sign a covenant not to compete or a non-solicitation agreement to work in Chicago or anywhere in Illinois, we highly recommend reviewing it with an attorney first. In fact, in most situations, a new law in Illinois effective January 1, 2022 gives you that right. Contact DeBlasio & Gower LLC attorneys at (630) 560-1123 for a consultation on your employment contract issue.
Covenants Not to Compete – The Basics
A covenant not to compete restricts an employee from working in a profession for a specified length of time. Geographic restrictions may also apply.
Under Illinois law, covenants not to compete are generally disfavored and held to a high standard. Also known as a “restrictive covenant,” a covenant not to compete generally will be enforced if it contains a reasonable restraint and the agreement is supported by consideration.
Illinois courts generally consider three factors to determine whether a covenant not to compete contains a reasonable restraint:
(1) Is the restraint reasonable (in terms of length of time, geographic area and scope) or is it greater than required to protect a legitimate business interest of the employer? This first factor is generally “based on the totality of the facts and circumstances of the individual case,” including without limitation the near-permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions.
(2) Does the restraint impose an undue hardship on the employee?
(3) Does the restraint pose an injury to the public?
Although an employer faces a heavy burden to ultimately prevail, courts will only find such covenants facially invalid in extreme cases. One example of a covenant not to compete being too overbroad to be enforceable is one that prevents an employee from working in any role with a new employer.
Consideration for a Covenant Not to Compete
Like all contracts, a non-compete agreement requires consideration. In plain English, consideration means that you get something in return for what you’re giving. It’s often referred to in the legal realm as a “bargained-for exchange.”
Unlike a traditional contract, however, the threshold for what constitutes consideration is relatively high. As a hypothetical example, a new desk chair would not likely meet the bar in exchange for an employee signing a non-compete agreement, even though a new chair qualifies as getting something.
In Illinois, there is a “sufficient consideration” requirement, which requires an employee must have a two-year tenure before the agreement can be enforceable. This requirement applies even if an employee resigns within two years.
A non-solicitation agreement protects an employer from losing valuable staff members and profitable customers to a former employee’s new company. Under a non-solicitation agreement, you cannot recruit a former employer’s staff to come join you at your new company.
This practice is referred to as poaching. It also restricts an employee from soliciting customers from their former workplace.
Some professions are more customer-facing than others, and employers are naturally worried that when a star employee leaves, they will take the most profitable customers with them. Determining the value of customer relationships and those interactions can have an impact on how an employment agreement is structured.
In deciding how (and if) to enforce a covenant not to compete, the courts look at several factors, including how long it takes to cultivate the relationships, the financial investment required for customer acquisition, and how difficult a customer is to acquire.
From an employee standpoint, factors such as how the person interacted with the customer are also relevant. For example, a clerk in a discount store that had limited personal contact with clientele would likely not be subject to a non-solicitation agreement. On the other hand, a personal shopper at a designer boutique would probably not be allowed to take the customer Rolodex to a new store upon leaving her employer.
New Law in Illinois on Covenants Not to Compete and Non-Solicitation Agreements
Illinois courts historically have been less than friendly to restrictive covenants, and non-compete agreements in particular. On August 13, 2021, Governor JB Pritzker signed into law Public Act 102-0358, an amendment to Illinois’ “Freedom to Work Act,” which both codifies existing requirements under Illinois precedent, and imposes new restrictions on when, with whom, and under what circumstances Illinois will enforce non-compete and non-solicitation agreements.
The law takes effect on January 1, 2022, and will only apply to agreements entered into after that date.
What the New Law Covers
The Freedom to Work Act defines a “covenant not to compete” to include an agreement between an employer and employee:
- that restricts the employee from performing any work for another employer for a specified period of time, or from performing work for another employer that is similar to the employee’s work for the employer who is party to the agreement; or
- that imposes adverse financial consequences on a former employee if he/she/they engage in competitive activities after the termination of the employee’s employment with the employer.
Excluded from the definition are covenants not to solicit, confidentiality agreements, non-disclosure agreements covering trade secrets or inventions, invention assignment agreements, agreements related to the purchase or sale of a goodwill or ownership interest of a business, no rehire agreements, and agreements requiring advance notice of termination where the employee remains employed during the notice period.
Although the Act excludes “covenants not to solicit” from the definition of “covenant not to compete,” it does apply to non-solicitation covenants, as noted below. A covenant not to solicit is an agreement that restricts an employee from soliciting other employees for the purposes of employment with another entity, and/or restricts an employee from soliciting the employer’s customers or clients for the purpose of products or services (regardless of whether the solicitation is for a competing business or product) or otherwise interfering with the customer relationship.
Higher Salary Threshold for Covenants
Covenants not to compete and non-solicitation agreements are not reserved strictly for executives or highly skilled professionals. Historically, employers across the state have also instituted these agreements to keep low-wage employees from quitting and seeking higher wages somewhere else. The new law addresses this predatory practice and absolutely prohibits non-compete agreements and non-solicitation agreements in certain circumstances.
The Illinois Freedom to Work Act previously prohibited employers from entering into non-compete agreements with “low wage workers,” effectively defined to include anyone who earned under $13.00 per hour.
Under the new law in 2022, employers may not enter into a covenant not to compete with any employee who earns (or is expected to earn) $75,000 or less per year, and may not enter into a non-solicitation agreement with an employee who earns (or is expected to earn) $45,000 or less per year.
Notably, the new law defines earnings more broadly than base salary and includes bonuses, commissions, and tips, as well as elements of an employee’s total compensation that may not be reflected on a W-2 such as contributions to a 401(k) or to a flexible spending / health savings account.
For both non-compete agreements and non-solicitation agreements, the thresholds are scheduled to increase every five years until January 1, 2037, when the minimum annual earnings limits will be $90,000 for non-compete agreements and $52,500 for non-solicitation agreements.
Exempt Types of Employees
The new 2022 Illinois law also states that covenants not to compete with individuals (a) covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act, and (b) employed in construction (except for management, engineering, design, architectural, or sales employees) are “void and illegal.”
New COVID-19 Rules
The new 2022 Illinois law also bans non-compete and non-solicitation agreements 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. This provision seems to be separate and apart from the salary / earnings thresholds noted above.
So What Are The New Rules In Illinois in 2022?
Under the new 2022 Illinois law, to be enforceable a non-compete or non-solicitation agreements must meet certain requirements:
- The employee must receive adequate consideration. 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.”
- The agreement must be ancillary to a valid employment relationship.
- The agreement must be no more restrictive than required for the protection of the employer’s legitimate business interest.
- The agreement may not impose undue hardship on the employee.
- The agreement may not harm any public interest.
As noted above, some of these requirements under the new 2022 law are not entirely new, as they have been part of Illinois court precedent for some time. By way of example, the new law codifies the 2013 court decision in Fifield v. Premier Dealer Services, Inc., in which an Illinois appellate court held that absent consideration, an employee must remain employed for two years for continued employment to constitute adequate consideration for any post-employment restrictive covenant.
Under Fifield, if an employee subject to a non-compete agreement voluntarily left employment prior to two years, and no other consideration had been paid, the restrictive covenant was unenforceable.
Under the new law, if an employer seeks to enforce a restrictive covenant against a departing employee, but did not provide other consideration at the outset of employment, such as an undefined amount of money or additional “professional” benefit of value, the employer will still have to provide additional consideration at the conclusion of employment to ensure enforceability of the covenant.
The additional consideration does not need to be monetary, but employers should be prepared to establish any “professional” benefits the employee received in order to avoid a court finding an agreement unenforceable for lack of “adequate consideration.” The new law does not provide any guidance or a formula that would be used to make this determination; but the definition of “adequate consideration” seems to indicate that if an employer provides some sort of financial or professional benefit at the outset of employment and the employee works for some period of time less than two years, even if the financial or professional benefit is not adequate to support the restrictive covenant on its own, the agreement may be enforceable.
Reasonableness of the Covenant Under New Illinois Law
The new law also incorporates case law precedent regarding the relevant factors to evaluate whether a covenant not to compete or covenant not to solicit is reasonable in light of an employer’s legitimate business interest.
In evaluating whether a “legitimate business interest” exists, courts still look to “the totality of the facts and circumstances of the individual case,” including such factors as:
- The employee’s exposure to the employer’s customer relationships or other employees;
- The near-permanence of customer relationships;
- The employee’s acquisition, use, or knowledge of confidential information;
- Time and place restrictions and the scope of any activity restrictions.
The Illinois legislature also emphasized that the above factors are not the only ones that can be considered, that no single factor is controlling or given extra weight, that the determination is to be guided by all of the surrounding circumstances, and that “[t]he same identical contract and restraint may be reasonable and valid under one set of circumstances and unreasonable and invalid under another set of circumstances.” This, perhaps, may be the most important language in the 2022 law, as it truly expands what is meant by evaluating all relevant facts and circumstances.
Basic Requirements Under 2022 Law
The amendments that go into effect on January 1, 2022 also impose the following clear new rules:
- Employers must provide at least 14 calendar days for the employee to review the provisions of a covenant not to compete or non-solicitation agreement; and
- Employers must advise employees in writing to consult with an attorney before entering into the agreement.
Everyone’s Favorite Topic – Attorneys’ Fees
Under the new law, employees who prevail in such actions (whether brought as a complaint or counterclaim by the employer) will be able to recover reasonable attorneys’ fees and costs in addition to any remedies available pursuant to the agreement. Notably, there are no restrictions in the Act that would prevent an employer from including a provision requiring the employee to pay attorney’s fees if the employer is successful.
The new law also gives the Illinois Attorney General the power to conduct an investigation and bring an enforcement action where it “has reasonable cause to believe that any person or entity is engaged in a pattern and practice prohibited by” the Act. The Attorney General may obtain monetary damages, restitution, injunctive relief, and civil penalties of up to $5000 for a violation and up to $10,000 for each repeat violation within a five-year period. Each violation for each person subject to an agreement that violates the Act is considered a separate violation.
Keeping An Employee “On The Bench” – An Alternative?
The new law excludes “garden leave” type of agreements that mutually require the employer and employee to provide notice prior to separation, pursuant to which the employee remains a paid employee (but does not work) for the duration of the notice period. Such arrangements, in theory, bench an employee about whom an employer has concerns with respect to competition, but do not involve the same complexities with respect to protection of legitimate business interests, consideration, or reasonableness of restrictions. Illinois employers may want to evaluate such agreements as an alternative to non-compete agreements.
How DeBlasio & Gower LLC Can Help
It’s a common misconception that employers won’t bother enforcing an employment contract that contains restrictive covenants. However, you might be surprised to discover that these disputes happen frequently.
Instead of waiting until an issue arises after leaving an employer, you can save yourself a lot of stress and hassle by consulting with an attorney to make an agreement more favorable for you. These negotiations may include restricting the timeframe or radius that narrows the scope of when, where, and how you are able to compete or solicit customers so that you can continue to work untethered in your chosen industry or profession.
If you have been threatened with a lawsuit regarding a covenant not to compete or non-solicitation agreement, our attorneys have over 40 years of combined litigation experience to help you navigate your way through such a lawsuit, and perhaps, even avoid one entirely.
At DeBlasio & Gower, our attorneys, have worked with employees and employers in many different industries throughout the Chicago area and Illinois. We welcome the opportunity to consult with you in regard to your covenant not to compete or non-solicitation agreement issues. Contact us at (630) 560-1123 for a consultation.