Nationwide Employers Take Note: Illinois Amendments to Freedom to Work Act Take Effect, Clarifying Limits on Restrictive CovenantsFebruary 2, 2022
Illinois joined the ranks of many states that have limited the use of restrictive covenants (e.g., non-competition and non-solicitation agreements) as its recent amendment to the Freedom to Work Act (the “Act”) took effect last month. The legislation, Illinois Senate Bill 672 (“SB 672” or the “Amendment”), imposes additional restrictions on employers’ use and enforcement of non-competition and non-solicitation covenants. SB 672, which was passed in August of 2021 and took effect on January 1, 2022, clarifies ambiguities in the original Act and imposes additional requirements on Illinois employers seeking to use and enforce restrictive covenants.
Illinois’ move places it among several other states that ban or limit restrictive covenants, which include California, North Dakota, Montana, Oklahoma, as well as Washington D.C. Other states, including Massachusetts, Colorado, and Oregon, impose restrictions on non-competition and non-solicitation agreements. Restrictions on competition also face increased scrutiny under the Biden Administration, which issued a July 9, 2021 Executive Order encouraging the FTC to limit non-compete agreements, among other things. Illinois’ recent Amendment follows in this pro-competition trend.
Under the original Act, employers were prohibited from requiring “low-wage employees” to enter into “covenants not to compete.” The original Act did not specify whether this restriction extended to non-solicitation agreements. SB 672 addresses this ambiguity by adding language restricting “covenant[s] not to solicit”; this Amendment applies with equal force to agreements prohibiting the solicitation of customers, vendors, and employees. The Amendment also clarifies that provisions in the Act governing “covenants not to compete” do not apply to confidentiality or non-disclosure agreements, trade secret protection agreements, or agreements entered into in connection with purchase and sale transactions, among others.
The Amendment also expands the definition of “low-wage employee,” which was originally defined as any employee earning less than the greater of: 1) the applicable federal, state, or local hourly minimum wage; or 2) $13.00 per hour. Now, the Act prohibits non-competition covenants and non-solicitation covenants unless an employee’s actual or expected annualized rate of earnings exceeds $75,000 or $45,000 per year, respectively. The Amendment sets these amounts to increase incrementally in 2027, 2032, and 2037.
SB 672 also codifies holdings from two Illinois cases. It adds the defined term “adequate consideration,” which, if provided to an employee, may render a non-competition or non-solicitation covenant enforceable. The Amendment assigns it the following meaning: “(1) the employee worked for the employer for at least 2 years after the employee signed an agreement containing a covenant not to compete or a covenant not to solicit or (2) the employer otherwise provided consideration adequate to support an agreement to not compete or to not solicit, which consideration can consist of a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.” SB 672 § 5. This definition was articulated in the case Fifield v. Premier Dealer Services, Inc., 993 N.E.2d 938 (Ill. App. Ct. 2013).
The Amendment also adopts the factors set forth in Reliable Fire Equipment Co. v. Arredondo, 965 N.E.2d 393 (Ill. 2011) for determining whether a “legitimate business interest” supports a restrictive covenant. SB 672 § 7. These factors include “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 through the employee's employment, the time restrictions, the place restrictions, and the scope of the activity restrictions.” Id.
The Act now also includes a severability clause authorizing courts to exercise their discretion to engage in “blue-penciling,” meaning they can alter or sever overly-broad or otherwise unenforceable restrictive covenants, as opposed to striking the provisions altogether.
Under the amended Act, employers are required to provide employees with 14 days to review proposed restrictive covenants and to advise employees in writing to consult with an attorney before entering into such an agreement.
Furthermore, the Act now includes pandemic-related protections for employees who were furloughed or laid off due to COVID-19-related (or similar) issues. Such employees are not subject to non-competition or non-solicitation agreements, unless that agreement provides for compensation equivalent to the employee’s base salary at the time of termination, less any income earned through subsequent employment, during the enforcement period.
The Amendment also revises the provisions relating to fee-shifting such that employees may now recover attorneys’ fees and costs from employers in unsuccessful enforcement actions. Employers are not granted a counterpart right under SB 672. The Illinois Attorney General is given authority to investigate and prosecute violations of the Act.
What Employers Doing Business in Illinois Need to Know
- The amendment is forward-looking in nature; the new restrictions are not retroactive, and apply to agreements entered on or after January 1, 2022.
- Employers doing business in Illinois should consult an attorney to determine whether their agreements or workplace policies fall within the scope of the Act.
The text of Illinois Senate Bill 672 can be found here:
Bill Text: IL SB0672 | 2021-2022 | 102nd General Assembly | Chaptered | LegiScan
The Biden Administration’s July 9, 2021 Executive Order can be found here:
Executive Order on Promoting Competition in the American Economy | The White House
Please contact a member of Herrick’s Employment Group with any questions.
John H. Chun at +1 212 592 1546 or [email protected]
Silvia Stockman at +1 212 592 1583 or [email protected]
© 2022 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.