Amendments to the Illinois Freedom to Work Act Further Limit Employers’ Use of Restrictive Covenants

Given the increasingly negative view of the use of restrictive covenants in employment agreements, and consistent with the growing trend in this country, the Illinois legislature’s recent amendments to the Illinois Freedom to Work Act ¹ (“Act”) will significantly curtail the ability of employers to bind their employees to non-competition and non-solicitation agreements. The key provisions of the statute not only limit eligibility conditions on agreements executed after January 2, 2022 but also impose potentially significant penalties on employers that fail to comply with the newly enacted rules.

Below is a summary of certain notable changes to the Act:

The prior version of the Act provided that workers being paid $13 per hour or less could not be bound by a non-compete agreements. The new law serves to expand the number of protected employees by prohibiting employers from enforcing non-competes against any employee whose annual income does not exceed $75,000². The minimum income requirement is set to increase to $80,000 in 2027, $85,000 in 2032, and $90,000 in 2037. Similarly, the amended law prohibits the enforcement of non-solicitation agreements against employees earning less than $45,000 per year, with that minimum likewise increasing in 2032 and 2037³.

The Act contains a new provision barring employers from entering into non-compete or non-solicitation agreements with any employee that was terminated, furloughed, or laid off as a result of the COVID-19 pandemic⁴. But the prohibition will not apply if the employer pays compensation equivalent to the employee’s base salary at the time of termination for the period of enforcement (less compensation earned through subsequent employment during the period of enforcement).

The amendment prohibits non-compete agreements for employees working in construction, except those who primarily perform management, engineering, architectural, design or sales functions or those who are shareholders, partners, or owners of a company in the construction industry⁵. It also prohibits non-compete agreements for individuals covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act.⁶

Among other important amendments, the Act codifies prevailing case law regarding the enforceability of restrictive covenants. In particular, the new law explicitly provides that non-competition and non-solicitation agreements are illegal and 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 for the protection of a legitimate business interest of the employer; (4) the covenant does not impose undue hardship on the employee; and (5) the covenant is not injurious to the public.⁷

Consideration. The issue of “consideration” necessary to support an enforceable agreement has been an important and controversial issue in Illinois for several years. Since 2013, a majority of (but not all) state and federal courts in Illinois have followed the “two-year rule” originally recognized the First District Court of Appeals in Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327 – which concluded that at-will employment alone is not sufficient consideration to support a non-compete agreement unless the employee has worked continuously for at least two years. The courts, however, recognized that under certain situations other forms of consideration could also be sufficient even if the employee worked for less than two years. The new law specifically defines “adequate consideration” as meaning the employee worked for the employer for at least two years following the execution of the agreement or the employer otherwise provided additional professional or financial benefits in exchange for agreement (such as a raise, signing bonus, stock options, etc.)⁸. In other words, mere employment, if for less than two years, cannot reasonably be expected to support non-compete or non-solicitation agreements under Illinois law.

Legitimate Business Interest. The Act also codifies the requirement previously articulated by Illinois’ courts that a restrictive covenant must be supported by a legitimate business interest. Such interests would typically include protection of the employer’s trade secrets or customer relationships. The new law provides that when determining whether a legitimate business interest exists sufficient to support a post-employment restrictive covenant, “the totality of the facts and circumstances of the individual case shall be considered” and “each situation must be determined on its own particular facts.”⁹ Relevant factors include: the employee’s exposure to the employer’s customer relationships or other employees, the near-permanence of customer relationships, the employee’s acquisition, use or knowledge of confidential information, and the time, place, and scope of restrictions.

The current version of the Act mandates that employees be given at least 14 days to review an employment agreement.¹⁰ The law also requires that employees be advised in writing to consult with counsel before signing the agreement. If the above conditions are not satisfied, the agreement will be deemed illegal and void.

Another important change to the Act is the addition of strict new penalties against employers that fail to comply with the Act. First, in addition to other remedies available under Illinois law, the Act contains a new mandatory fee shifting provision that entitles an employee who prevails against an employer attempting to enforce a non-competition or non-solicitation agreement to recover all reasonable attorneys’ fees and litigation expenses.¹¹ Additionally, any employer engaging in a pattern or practice prohibited by the Act may be investigated by the Illinois Attorney General, who is also empowered to initiate or intervene in a civil action.¹² Moreover, employers subject to prosecution by the Illinois Attorney General may be fined $5,000 for each violation or $10,000 for each repeat violation within a five-year period.¹³

The Act cautions against extensive judicial reformation of overbroad restrictive covenants but nevertheless provides courts with discretion to modify or sever provisions of employment agreements rather than holding them unenforceable. Relevant factors in determining whether reformation is appropriate include: the fairness of the restraints as originally written; whether the original restriction reflects a good-faith effort to protect the employer’s legitimate business interest; the extent of such reformation; and whether the parties included a clause authorizing reformation in the agreement.

The Act does not apply the following types of employment related agreements: (1) confidentiality agreements; (2) agreements prohibiting the use or disclosure of trade secrets; (3) invention assignment agreements; (4) garden leave clauses (agreements that require a specific period of advance notice of termination, during which time the employee remains employed and continues be compensated); (5) restrictive covenants entered into as part of a business acquisition or sale, including acquiring or disposing of an ownership interest in a business; and (6) agreements where an employee agrees not to reapply for employment to the same employer after termination.¹⁴

The Act is clearly designed to encourage employers to think carefully and to exercise caution in determining whether employees should be subject to restrictive covenants and how broadly those covenants should be drafted. While this more individualized, case-by-case approach may require additional up-front work from the employers’ perspective, it is necessitated by Illinois’ new legislation and should ensure a greater likelihood of successful enforcement later. For Illinois employees, this Act should be viewed.