Starting January 1, 2022, the Illinois General Assembly’s amendments to the Illinois Freedom to Work Act (IFWA) will expand restrictions on noncompete and non-solicitation agreements in employment contracts. The prior version restricted an employer’s ability to include noncompete language, agreements prohibiting an employee from working for a former employer’s competitors during a specific timeframe within a specified geography, for lower wage employees. The noncompete restrictions will now extend to higher wage employees. The IFWA also now includes non-solicitation agreement restrictions, agreements that prohibit a former employee from soliciting a former employer’s customers or employees.
For employers, this means updating forms, offer letters, and shareholder agreements to comply with new IFWA standards. Here are additional details on the amendments and what employers need to be prepared to address.
IFWA’s amendments to “restrictive covenants”
Non-competition and non-solicitation agreements are two types of what are sometimes called “restrictive covenants.” The IFWA amendments will include both non-solicitation and non-competition agreements and do all of the following:
- Non-compete agreement restrictions. The prior version of the IWFA prohibited employers from entering into non-competition agreements with employees earning no more than the minimum wage or less. Beginning January 1, Illinois employers cannot enter into non-competition agreements with any employee who earns less than $75,000 annually, with that amount increasing by $5000 every five years until 2037.
- Non-solicitation agreement restrictions. Beginning January 1, Illinois employers cannot enter into non-solicitation agreements with any employee who earns less than $45,000 annually, increased by $2500 every five years until 2037.
- Salary thresholds. These thresholds include not just base salary and wages, but all bonuses, commissions, tips, or other taxable compensation from the employer, along with elective deferrals to fringe benefit plans.
Additional requirements
Even for employees who meet these minimum salary requirements, the IFWA amendments impose additional requirements. Specifically, the employer must:
- Provide the employee with at least 14 days to review the proposed agreement (for a new hire, 14 days prior to starting work); and
- Advise the employee in writing to consult with an attorney prior to signing the agreement.
Employees Laid Off or Terminated Due to COVID-19
In addition, employees are not bound by restrictive covenants if they were terminated or laid off due to COVID-19 or “similar reasons.” Specifically, the amended IFWA states that any restrictive covenant with any employee who the employer terminates, furloughs, or lays off as the result of “business circumstances or governmental orders” related to the COVID-19 pandemic or “under circumstances that are similar to the COVID-19 pandemic” is void unless the agreement provides the employee with compensation equal to the employee’s base salary at the time of termination for duration of the covenant, less compensation earned through subsequent employment.
Requirements for “Adequate Consideration”
The amended IFWA also imposes additional requirements regarding adequate consideration required to support restrictive covenants. “Adequate consideration” is now defined as follows: 1) the employee worked for the employer for at least two years after the employee signed an agreement containing a non-competition or non-solicitation agreement; or 2) the employer otherwise provided consideration adequate to support a non-competition or non-solicitation agreement, which can include a period of employment plus additional professional or financial benefits, or merely professional or financial benefits adequate by themselves.
The amended IFWA essentially codifies Illinois case law, which has consistently held that “at-will” employment or continued at-will employment alone is insufficient consideration to support non-competition agreements if the employment lasts for less than two years.
Penalties for Violation of the Illinois Freedom to Work Act
If an employer violates the IFWA, the restrictive covenant invalid and the Illinois Attorney General also can investigate violations if it has reasonable cause to believe the employer has a pattern or practice of violating the IFWA. This can result in penalties of up to $5,000 per violation or $10,000 for multiple violations within a five-year period.
If the employee wins a case against an employer attempting to enforce a restrictive covenant, the employee is entitled to recover his or her reasonable attorney’s fees from the former employer. If the employer prevails, however, the employer is not entitled to its attorneys’ fees unless the terms of the restrictive covenant agreement contain a valid attorney’s fees clause.
Key Takeaways for Employers
What are the key takeaways for Illinois employers? First, if you have locations and employees in Illinois, immediately review the forms you use for restrictive covenants like noncompete and non-solicitation agreements, and if necessary, revise them to comply with the IFWA amendments. Also, if you have restrictive covenants imbedded in other less obvious locations, such as offer letters or shareholder agreements, review those and revise any such documents that you might use after January 1, 2022.
For more information and assistance with your employment contract needs, contact members of our Employment/Labor Group:
