The Illinois House and Senate have agreed on a version of the Illinois Freedom to Work Act, which is waiting for Governor Pritzker to sign into law. The Act puts restrictions on which employees can be subject to covenants not to compete and covenants not to solicit.
Under the Act, an employer cannot enter into a covenant not to compete with an employee unless that employee’s actual or expected earnings exceed a certain level. Initially, the employee’s annualized rate of earnings must exceed $75,000 per year. However, that amount increases to $80,000 on January 1, 2027, to $85,000 on January 1, 2032, and to $90,000 on January 1, 2037.
Similarly, an employer cannot enter into a covenant not to solicit with an employee unless that employee’s actual or expected annualized rate of earnings exceeds $45,000 per year. That amount increases to $47,500 on January 1, 2027, to $50,000 on January 1, 2032, and to $52,500 on January 1, 2037.
With regard to severance agreements, the Act prohibits an employer from entering into a covenant not to compete or covenant not to solicit with an employee who is terminated, furloughed or laid off as a result of business circumstances or governmental orders related to or similar to the COVID-19 pandemic. However, this prohibition is waived if the employer pays the employee compensation that is equivalent to the employee’s base salary at the time of separation for the period of enforcement minus any compensation the employee earns from subsequent employment during the same period.
If an employee is covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Labor Relations Act, a covenant not to compete is void and illegal. Similarly, a covenant not to compete is void if the individual is employed in construction, unless that person primarily performs management, engineering, architectural, design or sales functions or are shareholders, partners or owners.
In order for a covenant not to compete and covenant not to solicit to be valid, the employer cannot just provide the employee with an agreement to sign that contains the restriction. Employers will have to: (1) advise the employee in writing to consult with an attorney before entering into any agreement containing a restrictive covenant; and (2) the employer must provide the employee with a copy of the restrictive covenant at least 14 days before the commencement of the employee’s employment.
The Act also allows the employee to recover attorney’s fees in any civil action or arbitration that is filed by an employer if the employee is the prevailing party. In addition, if the Attorney General of Illinois believes that a person or employer is engaged in a pattern and practice prohibited by the Act, the Attorney General may initiate or intervene in a civil action to obtain appropriate relief.
The Act also codified what has been set forth in Illinois case law regarding restrictive covenants. While traditionally Illinois courts have had the ability to rewrite an overly broad restrictive covenant, the Act recognizes that a court may choose not to rewrite an overly broad restriction. The Act suggests that a court consider the following factors before deciding whether to rewrite an overly broad covenant: (1) the fairness of the restriction as originally written, (2) whether the original restriction reflects a good-faith effort to protect a legitimate business interest of the employer, (3) the extent of the reformation and (4) whether the parties included a clause authorizing modifications to their agreement. In addition, the Act provides guidance on the factors to consider in determining an employer’s legitimate business and what constitutes adequate consideration to support a restrictive covenant.
Importantly, the Act does not become effective until January 1, 2022. As a result, employers have some time to think about how the Act will affect their business starting in 2022 and will have some time to enter into restrictive covenants with employees before 2022 that will be prohibited under the Act. I will write more about that in a future post.
If you have questions or would like to discuss how the Act will affect your business, please contact Thad Felton at (312) 345-5023 or taf@greensfelder.com.