Illinois Legislature Narrows Restrictive Covenant Enforcement
Restrictive covenants are contractual terms that restrict an employee’s ability to work for a competitor. Historically, these covenants were often used to prohibit high-level executives or employees with proprietary knowledge from working directly for a competitor. Today, restrictive covenants are increasingly used for even lower-level employees.
Examples of restrictive covenants are: “employee may not compete directly or indirectly with employer for a period of two (2) years after leaving the company,” or “employee may not do business within a 50-mile radius of the business after employment termination.” Under Illinois law, a restrictive covenant must be:
1. necessary to protect a legitimate business interest;
2. limited in terms of duration, geographic scope, and prohibited activity;
3. supported by sufficient consideration; and
4. ancillary to a valid employment agreement or sale of a business.
In 2016, the Illinois Freedom to Work Act (“IFWA”) was passed, which prohibited employers from implementing restrictive covenants for low-wage employees. IFWA defines low-wage employees as “an employee whose earnings do not exceed the greater of (1) the hourly rate equal to the minimum wage required by the applicable federal, state, or local minimum wage law or (2) $13.00 per hour.”
On January 8, 2021, the Illinois legislature introduced House Bill 789 (“Bill 789”), which seeks to expand the scope of IWFA as follows:
1. covenants not to compete are neither valid nor enforceable unless the employee’s actual or expected yearly earnings exceed $75,000. Every 5 years, the yearly earnings figure will increase by $5,000;
2. covenants not to solicit are neither valid nor enforceable unless the employee’s expected yearly earnings exceed $45,000. Every 5 years, the yearly earnings figure will increase by $2,500;
3. covenants not to compete are neither valid nor enforceable if the employee subject to the covenant was terminated or furloughed due to the COVID-19 pandemic. Additionally, covenants not to compete are neither valid nor enforceable if the employee is terminated or furloughed under circumstances that are similar to the COVID-19 pandemic (such “circumstances” are not defined by Bill 789) unless enforcement of the covenant includes the payment of the employee’s base salary for the period of enforcement of the covenant, minus compensation received by the employee through subsequent employment; and
4. the employer must advise its employees in writing to consult with an attorney before agreeing to a non-compete or non-solicitation clause. Additionally, the employer must supply a copy of the clause at least 14 days before execution for the employee’s review.
Furthermore, the legislature also established five components necessary for a valid restrictive covenant. A restrictive covenant is void unless:
1. the employee receives adequate consideration;
2. the covenant is ancillary to a valid employment relationship;
3. the covenant is no greater than is required to protect the legitimate business interest of the employer;
4. the covenant does not impose an undue hardship on the employee; and
5. the covenant is not injurious to the public.
If an employer seeks to enforce a restrictive covenant and fails to succeed because the covenant is deemed unenforceable, Bill 789 would require the employer to pay the employee’s reasonable attorneys’ fees and costs. Significantly, Bill 789 does not apply retroactively.
It is expected that Bill 789 will pass in some form and would go into effect on June 1, 2021. Employers should consider whether they want to implement restrictive covenants in some form prior to Bill 789 being enacted into law, as those covenants will be grandfathered in.
For additional help navigating these issues, feel free to contact Roenan Patt, an attorney in the employment and business law practice at Levin Ginsburg, at email@example.com or Joseph A. LaPlaca, an attorney at Levin Ginsburg, at firstname.lastname@example.org.