What Employers Should Note in Illinois' New Noncompete Law
Companies with operations and employees in Illinois need to take stock of their restrictive covenant agreements to ensure that they comply with the legislative package passed unanimously over Memorial Day weekend, which Gov. J.B. Pritzker finally signed earlier this month.
Now that it has been signed, Public Act 102-0358 will take effect on Jan. 1, 2022, impacting all agreements entered into on or after that date.
While companies have more than four months to reform their restrictive covenant approaches and human resources practices to comply with the law, that process should begin now.
Among other significant legislative provisions — which address the enforceability, construction and reformation of noncompetes and nonsolicits, provide for recovery of legal fees to prevailing employees, and establish an administrative enforcement mechanism and penalties — the Illinois act raises the following notable issues.
A Possible (If Not Unintended) Focus on During-Employment Covenants?
The act defines the term "covenant not to compete" as:
an agreement between an employer and an employee ... that restricts the employee from performing: (1) any work for another employer for a specific period of time; (2) any work in a specified geographical area; or (3) work for another employer that is similar to employee's work for the employer included as a party to the agreement."
The definition of "covenant not to solicit" is similarly worded in the act.
As drafted, those definitions include — or at least fail to exclude — noncompetes and nonsolicits that apply during employment within the legislation's scope.
It is unclear whether that is the result of an oversight in drafting, or whether it was a policy decision made by the Legislature — perhaps taking a cue from the District of Columbia, which overtly attacked during-employment noncompetes and other policies restricting employees' outside activities and employment earlier this year.
Unless and until some clarity is provided by the Illinois Legislature, either through some signing statement or other publicly available legislative history, or through an amendment, employers' use of during-employment noncompetes and nonsolicits arguably must be conditioned on the same legislative income thresholds and other requirements and limitations in the act that would apply to post-employment noncompetes and nonsolicits.
Going one step further, the act appears to encompass common clawback or forfeiture provisions, such as those used with signing bonuses, incentive programs and stock awards, since the act defines "covenant not to compete" also to include:
an agreement between an employer and an employee ... that by its terms imposes adverse financial consequences on the former employee if the employee engages in competitive activities after the termination of the employee's employment with the employer.
It is unclear whether that definition extends the act's reach to provisions of that sort included as a condition for severance pay, which is significant given that the Legislature elected not to exclude severance agreements from the scope of the act as other states, such as Massachusetts, have.
Notably, the act does not bar or affect the use of noncompetes or nonsolicits with the owners and buyers/sellers of a business in connection with acquisitions.
Income Thresholds for Noncompetes and Nonsolicits
For years, legislative bodies across the country have sought to limit the use of noncompetes with low-wage workers, and they have primarily focused on post-employment noncompetes.
But their efforts have varied in ways transcending any justification based simply on cost of living, skill level or access to confidential information.
Setting aside the District of Columbia's recent ban on during- and post-employment noncompetes regardless of income level (with narrow exceptions), the most aggressive approach arguably has been the state of Washington, which imposed an income threshold for post-employment noncompetes of $100,000, adjusted annually — hardly an income one would consider a low wage, particularly outside of Seattle.
Oregon recently enacted legislation adopting a similar threshold.
Other states have focused on incomes at low multiples of the poverty level, on minimum-wage workers and on other benchmarks closer to around $35,000, adjusted annually.
Virginia and some other states have settled in between with thresholds of around $60,000, adjusted annually.
Illinois has now taken a different approach, nearing the aggression taken in the Pacific Northwest, but also extending the use of income thresholds to once-sacred nonsolicits — including not just provisions barring solicitation of customers and business partners, but provisions barring solicitation of employees as well.
Specifically, the act bans the use of noncompetes for employees whose annualized or expected earnings are less than $75,000, subject to $5,000 upward adjustments every five years.
And the statute bans the use of nonsolicits for those whose annualized or expected earnings are less than $45,000, subject to $2,500 upward adjustments every five years.
Fortunately, the law expressly notes that the thresholds include not just earned salary, but also "earned bonuses, earned commissions, or any other form of taxable compensation" and other elective deferrals, providing a road map for employers to structure compensation to meet the act's requirements.
Also fortunate for employers, employees at all income levels may remain bound by confidentiality restrictions and obligations with respect to inventions and other work product, and will remain bound by statutory limitations on the acquisition, use or disclosure of trade secrets.
Although not specifically wage-related, companies should also take note that the Illinois law bans the use of noncompetes, regardless of income level, with individuals covered by collective bargaining agreements under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act, subject to an exception for certain construction employees, against whom noncompetes may still be enforced provided they comply with other aspects of the law.
Murky Ban on Covenants for Employees Affected by Emergencies
The legislation also mandates that companies cannot "enter into" noncompetes and nonsolicits with employees who were terminated, furloughed or laid off as a result of either business decisions or governmental mandates arising out of the COVID-19 pandemic (and, in the future, other similar types of pandemics or emergencies) unless garden-leave payments are provided during the restricted period.
Because the act's wage threshold limitations are not incorporated into the definitions of "covenant not to compete" and "covenant not to solicit," this provision evidently applies to all noncompetes and nonsolicits, regardless of income level.
This approach is interesting because it does not prohibit enforcement after the law's effective date of existing agreements against employees previously terminated, furloughed or laid off as a result of COVID-19 — something the Legislature could have enacted that may have had some teeth and beneficial impact for workers.
But since the legislation will not apply until 2022, has no retroactive application and is expressly aimed at a ban from entering into noncompete and nonsolicit agreements, most individuals likely will have rejoined employers or obtained jobs elsewhere prior to its effective date — barring another wave of shut-down orders or practices.
Therefore, this provision would not expressly apply to them, assuming they had entered into restrictive covenant agreements before that date.
That is good news for most employers, but will it really provide a meaningful benefit to employees affected previously by the COVID-19 pandemic?
To that end, when, if ever, does a prior layoff or furlough due to the pandemic cease to require the use of garden leave payments under the act?
For instance, would the legislation apply to a lucrative promotion offered and accepted in 2022 with the same employer that had, in 2020, furloughed an employee and brought her back in the spring of 2021, before the act's effective date?
And would it apply if a once-furloughed employee joins a company that did not even implement the furlough in the first place, as the loosely worded text of the provision in the act conceivably could be interpreted?
Both are harder to rationalize from a policy perspective, but none of that appears to be answered expressly at the moment given the paucity of legislative history available in Illinois.
Waivable Advance Notice and Advice to Consult With Counsel
Like most other legislative packages over the last few years, the Illinois law requires that companies provide employees with a copy of a noncompete or nonsolicit agreement in advance of starting a new role, and that companies advise employees "in writing to consult with an attorney before entering into the covenant."
As to the notice requirement, the act requires that
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.
Unlike other recent statutes, it is important to note that the act permits the employee to waive that advance notice or review period such that "[a]n employer is in compliance … even if the employee voluntarily elects to sign the covenant before the expiration of the 14-day period."
However, the Legislature's use of the conjunction "or" and its inclusion of the express waiver provision fail to provide clarity as to what that waiver provision will really mean in practice, and whether it may even permit an employee to sign an agreement after having started in the new employment position — something not permitted under Pennsylvania law and in a growing list of other jurisdictions, absent additional consideration.
A Muddled Attempt at Defining "Adequate Consideration"
The Illinois law also attempts to provide some clarity as to the length of employment that would constitute adequate consideration to support a restrictive covenant agreement.
Embracing a test crafted and applied by courts over the years, the law defines "adequate consideration" as:
(1) the employee worked for the employer for at least 2 years after the employee signed an agreement containing a covenant not to compete or a covenant not to solicit or (2) the employer otherwise provided consideration adequate to support an agreement to not compete or to not solicit, which consideration can consist of a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.
That definition, like the court test, leaves a lot to be desired.
On the plus side, if, at the time of enforcement, a company knows an employee has worked for more than two years since signing the restrictive covenant agreement, consideration should be established. That certainty is welcome.
But, as is often the case, individuals may have been employed for less than two years after having signed such an agreement, particularly when companies utilize new agreements with lateral role changes or promotions. It is not entirely clear what becomes of the restrictive covenants signed by such employees.
Can an employer rely on a prior agreement, assuming it was not superseded?
Alternatively, what forms of other consideration are reliably adequate to support such restrictions?
The legislation uses the phrase "otherwise provided consideration," seeming to offer a broad range of options, but then proceeds to list only two forms which it states "can" suffice.
While the act does not expressly limit the other forms of consideration to professional or monetary benefits of those sorts, it fails to provide absolute clarity for employers.
Continued Viability of Provisions Requiring Advance Notice of Termination
The statute does expressly exclude from the definition of "covenant not to compete" contract provisions
requiring advanced notice of termination of employment, during which notice period the employee remains employed by the employer and receives compensation.
Presumably, that includes contract provisions requiring employers to provide advance notice of a termination, as well as contract provisions requiring employees to provide advance notice of a resignation.
By permitting companies to utilize advance notice requirements, the legislation appears to provide companies with two valuable opportunities:
- The ability to control competitive conduct and facilitate the transition of responsibilities while an employee is preparing to leave, presumably at any income level; and
- Time to try to assess, while an employee is still on the payroll, the nature of an employee's future employment plans and whether those plans may implicate viable post-employment noncompete, nonsolicit or confidentiality obligations.
Given the significance of these statutory revisions and others not itemized here, to comply with the new legislation upon its effective date on Jan. 1, 2022, companies with operations or employees in Illinois should begin evaluating:
- Current restrictive covenant forms and practices;
- Compensation packages and approaches;
- Practices with respect to presentation of offers of employment and restrictive covenants;
- Furlough and pandemic policies and practices; and
- Other on- and off-boarding practices.
In doing so, companies should also take advantage of the employer-friendly aspects of the legislation, and consider implementation of other viable strategies that remain effective at curbing unlawful competition and protecting confidential and trade secret information, investments in employee training and education, customer and other business relationships, and goodwill.
Among them are the use of reasonable choice-of-law and exclusive venue provisions, neither of which the act expressly bans.
“What Employers Should Note in Illinois' New Noncompete Law,” by Kevin Passerini was published in Law360 on August 23, 2021.