Category Archives: Freedom to Work Act

Illinois Legislature Passes Comprehensive Non-Compete Legislation

Contributed By Jeffrey Glass, June 11, 2021

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As reported in prior blogs, the Illinois legislature for several months has been considering amendments to the Illinois Freedom to Work Act that apply to non-compete and non-solicitation restrictions. SmithAmundsen attorneys worked closely with the Illinois Chamber of Commerce to protect the interests of employers as much as possible during the legislative process. 

The legislature has now passed SB672. It is generally viewed as a compromise between employer and employee interest groups. It is not a ban on restrictive covenants, but it does impose important limits on them.

The legislature will send SB672 to Governor Pritzker for signature before the end of the month. The governor then will have up to 60 days from receipt to act. It is widely expected that the governor will sign the bill, probably sometime in August.

The amendments are effective for any contract entered into after January 1, 2022.  

The legislation is comprehensive and detailed, and should be read in its entirety. However, important highlights of the new legislation include the following:

Income Thresholds for Non-Compete and Non-Solicitation Agreements

One of the most important changes is the establishment of income thresholds for non-compete and non-solicitation agreements. 

For agreements entered into on or after January 1, 2022, an employee’s actual or expected annualized earnings must exceed $75,000 per year in order for the employee to be subject to a non-compete clause. This threshold increases to $80,000 on January 1, 2027, $85,000 on January 1, 2032, and $90,000 on January 1, 2037. A non-compete agreement does not include a confidentiality agreement or a covenant prohibiting the use or disclosure of trade secrets or inventions, so those contracts can continue to be used regardless of the employee’s income.  

Additionally, for agreements entered into on or after January 1, 2022, an employee’s actual or expected annualized earnings must exceed $45,000 per year in order for the employee to be subject to a non-solicitation clause. This threshold increases to $47,500 on January 1, 2027, $50,000 on January 1, 2032, and $52,500 on January 1, 2037. A non-solicitation agreement includes any agreement that bans solicitation of not only customers or prospective customers, but also employees, and vendors, among other categories.

“Earnings” for purposes of these thresholds includes earned salary, earned bonuses, earned commissions, or any other form of compensation reported on an employee’s IRS Form W-2.

The legislation also prohibits employers from entering into a covenant not to compete or not to solicit with any employee who an employer terminates, furloughs, or lays off as the result of business circumstances or governmental orders related to COVID-19, or under circumstances that are similar to the COVID-19 pandemic, unless the employer pays the employee pursuant to a formula contained in the Act. It also prohibits covenants not to compete for individuals covered by a collective bargaining agreement under the Illinois Public Labor Relations Act, the Illinois Educational Labor Relations Act, or certain individuals employed in the construction industry. Construction employees who primarily perform management, engineering or architectural, design or sales functions for the employer; or are a shareholder, partner, or owner in any capacity for of the employer may be covered by a covenant to compete or a covenant not to solicit.

Pre-Signing Notice and Review Period

The legislation adds a new Section 20 which provides that non-compete and non-solicitation clauses are illegal and void unless (1) the employer advises the employee in writing to consult with an attorney before entering into the covenant; and (2) the employer provides the employee with a copy of the covenant at least 14 calendar days before the commencement of the employee’s employment or the employer provides the employee with at least 14 calendar days to review the covenant.

Attorney’s Fees for Employees Who Prevail in Litigation

Many restrictive covenants provide that the employer may recover its attorney’s fees if it prevails in litigation to enforce a covenant. The new legislation levels the playing field by providing that, if an employee prevails on a claim to enforce a covenant not to compete or a covenant not to solicit, the employee shall recover his or her attorney’s fees and costs.  

Attorney General Enforcement

The amendments also provide for the Illinois Attorney General to investigate and prosecute abusive restrictive covenant practices. If the Attorney General has reasonable cause to believe that an employer is engaged in a pattern and practice prohibited by this Act, the Attorney General may initiate or intervene in a civil action in the name of The People of the State in any appropriate court to obtain appropriate relief. The Act grants the Attorney General broad investigative powers and provides for a wide range of remedies including civil penalties not to exceed $5,000 for each violation or $10,000 for each repeat violation within a 5 year period.

Adequate Consideration Defined

The definition of “adequate consideration,” consistent with the Fifield v. Premier Dealer Services decision that was discussed in detail in a prior blog is that an “at will” employee must work for at least two years after entering into the restrictive covenant contract in order for it to be enforceable.  Notably, the new statutory standard of “at least two years” actually is stricter than the standard that courts developed in the wake of Fifield. Courts applying Fifield, particularly in the federal system, used two years as a rule of thumb, but were willing to find adequate consideration based on lesser periods of post-contract employment (e.g., 18 months) in certain cases, such as when the employee voluntarily resigned. The new legislation would appear to deny courts such flexibility. 

The amendments also provide, alternatively, that the employer can provide “a period of employment plus additional professional or financial benefits, or merely professional or financial benefits adequate by themselves.” After Fifield, many employers sought to avoid potential consideration problems by providing a monetary payment to the at-will employee as additional consideration for the agreement; otherwise they would run the risk that the restrictive covenant would be deemed unenforceable if the employee resigned or was terminated less than two years after signing the restrictive covenant agreement.  Unfortunately, as with Fifield itself, this new provision provides no guidance as to what “professional or financial benefits” would be deemed sufficient as an alternative to two years or more of at will employment.

Definition of Employer’s “Legitimate Interest” and Standard for Enforceability

SB672 adds new Sections 7 and 15 to the Act which essentially codify the approaches to determining the legitimate interest of the employer, and determining whether the restriction is enforceable to protect the interest, that were established in 2011 by the Illinois Supreme Court in Reliable Fire Equipment Co. v. Arredondo case also discussed in a previous blog. This approach provides that, while exposure to “near-permanent” client relationships and the possession of confidential information are legitimate interests, there is no limit as to what can be a protectable interest and the “totality of the facts and circumstances” must be considered by the court in every case. Once the interest is identified, the restrictions must be deemed reasonable according to various criteria, such as whether they are no more burdensome than necessary to protect the interest of the employer, and whether they are injurious to the public. No single factor is determinative and the same covenant could be enforceable in one case, yet not be enforceable in a different case. These provisions codify the approach that courts and practitioners have been following since Reliable Fire.  

Reformation of Overbroad Restrictions

As with the definition of “adequate consideration,” and the provisions regarding an employer’s legitimate interests and how to determine whether a restriction is reasonably tailored to protect the interest, SB672 adds a new Section 35 that essentially codifies existing law regarding the reformation of overbroad covenants. It provides that, while “extensive judicial reformation” may be against the public policy of the State of Illinois, a court may exercise its discretion to modify an unreasonable or overbroad restriction rather than hold that it is wholly unenforceable. Factors to be considered “include the fairness of the restraints as originally written, whether the original restriction reflects a good-faith effort to protect a legitimate business interest of the employer, the extent of such reformation, and whether the parties included a clause authorizing such modifications in their agreement.”

As stated above, these amendments apply to any restrictive covenant contract entered into after January 1, 2022. Employers obviously need to make sure any contracts entered into after that date fully comply with the new law. In addition, employers who would like to get restrictive covenants in place before these rules go into effect would be well-advised to work with experienced employment counsel to accomplish that objective in compliance with existing law.

Illinois Legislature Considering Freedom To Work Act Amendments That Target Non-Compete And Non-Solicitation Clauses

employment law books and a gavel on desk in the library. concept of legal education.

Contributed By: Jeffrey Glass, April 19, 2021

In recent years, many states have enacted legislation directed at employment contracts containing non-compete and non-solicitation clauses. Illinois first did so in 2016 with the Freedom to Work Act (the Act), which bans certain Illinois employers from entering into non-compete agreements with low-wage employees.

Now, the Illinois General Assembly has taken the matter up again with additional proposed amendments to the Act.

Although the new legislation has not been finalized, some provisions that appear likely to be included in the final version are: income thresholds for employees who are not “low wage,” a requirement that the employer provide the employee with a copy of the contract in advance of signing it, employee-friendly attorney’s fee-shifting provisions, and exemptions for union workers.  While the legislation primarily is geared toward protecting employees, it also helps employers by clarifying the state of the law on several issues, including clearer standards for the enforceability of non-compete clauses.

The amendments are projected to take effect on June 1, 2021, and will not apply to contracts entered into before that date.  Employers should contact their employment counsel to make sure any agreements entered into on or after the effective date comport with the new law. SmithAmundsen attorneys are working closely with employer-side groups on the legislation and will update readers of this blog as further developments arise.

Non-Compete Agreements For Low Wage Employees Barred by Illinois’ “Freedom to Work Act”

Contributed by Michael Wong and Jeff Glass, September 20, 2016

Recently the Illinois Attorney General filed a lawsuit against a well-known restaurant franchise seeking to enjoin it from enforcing non-compete provisions in employment agreements that it had required all employees to sign, including hourly employees such as delivery drivers. The clauses at issue prohibited employees from working at any other similar business within two miles of any of the franchisor or its franchisees’ stores in the United States. Even though the franchisor agreed to voluntarily drop these clauses moving forward, the Illinois legislature took action and the Illinois Freedom to Work Act (the Act) was signed into law.

15198483 - employment contract document form with penEffective January 1, 2017, the Act will prohibit private employers from having “low wage” employees sign an agreement that includes a covenant not-to-compete. Additionally, any covenant not-to-compete entered into between a “low wage” employee and an employer will be considered illegal and void under the Act.

The Act’s prohibition will apply to any employee who earns less than $13.00 per hour or the minimum wage required by applicable federal, state or local minimum wage law.  Employers can use $13.00 as the current high water mark for who is a low wage employee, as currently, the minimum wage under federal law is $7.25, $8.25 in Illinois and $10.25 in Chicago. However, it is important to remember that if the applicable federal, state or local minimum wage is higher than $13.00 than the individual will be considered a low wage employee under the Act.

The Act defines a covenant not-to-compete as any agreement between the employee and employer that restrict the employee from:

  • performing ANY work for another employer for a specified period of time;
  • working in a specified geographic area; OR
  • working for any other employer that is similar to the employee’s work for the employer.

While the Act only applies to agreements entered into after January 1, 2017, it is anticipated that any employer seeking to enforce this type of non-compete restriction against a low wage employee will likely be subject to the same scrutiny and battle as the franchisor who was investigated by the Illinois Attorney General.

It is important to recognize that the Act does not impact employers’ ability to include non-disclosure and confidentiality provisions within agreements with low wage employees to protect confidential and proprietary information. Additionally, the Act does not address agreements to not solicit an employer’s clients/customers or employees. While a non-solicitation clause could arguably fall within the type of non-compete agreement prohibited by the Act, there are strong arguments that depending on the position and circumstances, a well drafted and limited non-solicitation of clients/customers or employees agreement is different and would be enforceable.

As a practical matter, the impact of the Act will probably be minor. Most restrictive covenant litigation does not involve low wage employees. In addition, low wage employees rarely have the level of customer goodwill that is required to support the enforcement of a non-compete agreement. Nevertheless, employers who use restrictive covenants with low wage employees should take note.

Check this blog for future developments on this Act and other issues related to restrictive covenants and unfair competition.