New Illinois Law Changes the Restrictive Covenant Landscape
On May 31, 2021, the Illinois House and Senate both passed Illinois Senate Bill 0672, titled the Fair Food Delivery Act. While the Fair Food Delivery Act was passed with the goal of protecting small businesses from third-party delivery services using their likeness, trademarks or intellectual property without consent, it also contains provisions that would codify key aspects of Illinois law governing enforcement of restrictive covenant agreements. To that end, S.B. 0672 contains provisions that amend the Illinois Freedom to Work Act to restrict employer use and enforcement of these types of agreements. Governor Pritzker is expected to sign S.B. 0672 into law before August.
Restrictive covenant agreements are agreements that prohibit an individual from competing against their former employer for a certain timeframe. For example, a non-competition agreement restricts the ability of an individual to work for a related employer for a specific time and geographical area after their employment end while a non-solicitation agreement restricts an individual from marketing or hiring employees who currently work for the employer. The law in Illinois governing restrictive covenant agreements, including non-competition agreements and non-solicitation agreements, has principally been made through decisions in Illinois courts. Illinois courts typically enforce restrictive covenant agreements where an employer can show that the agreement was necessary to protect their legally protectable interests, based upon a factual analysis of the circumstances in each case under a reasonableness standard.
However, the law on restrictive covenants can be confusing and vary depending on the court. Prior to S.B. 0672, the Illinois legislature had not codified the relevant legal standards governing the enforceability of restrictive covenants. Under S.B. 0672, companies can continue to enforce non-compete and non-solicit agreements when there is a legitimate business interest a company needs to protect. However, use of these agreements is restricted in S.B. 0672 as follows:
- Non-compete agreements are prohibited for all employees making less than $75,000 per year starting in 2022, $80,000 per year starting in 2027, $85,000 per year in 2031 and $90,000 in 2037.
- Non-solicit agreements are prohibited for all employees who make less than $45,000 per year, with increases over time to $52,500 by 2037.
- Non-compete agreements will not be enforceable against employees who lost their jobs due to COVID-19 or a similar pandemic unless the former employer continues to pay their base salary.
- Independent consideration is required for a non-compete or a non-solicitation agreement to be enforceable, resolving a dispute between the state and federal courts in Illinois.
- Courts can only enforce a non-compete or a non-solicit agreement if an employee has worked for an employer for at least 2 years or has received some other benefit for the restriction.
- If an employee wins a lawsuit an employer filed seeking to enforce a restrictive covenant, the employee will be entitled to recover attorneys’ fees.
- Employers will be required to provide employees with 14 days to consider and review any non-compete or non-solicit agreement.
Once signed into law, SB 0672 will become effective as of January 1, 2022. The legal requirements set forth in S.B. 0672 do not apply to restrictive covenant agreements that are entered into prior to January 1, 2022. Thus, employers who have entered into legally enforceable agreements with their employees under the current state of the common law would be able to rely upon and enforce these agreements under the pre-existing, and potentially less restrictive, standards.
DiMonte & Lizak will continue to monitor new employment law developments in Illinois as they arise.