Illinois Adopts Comprehensive Non-Compete Statute Effective January 1, 2022

Governor Pritzker has signed a bill creating Illinois’ first comprehensive statute regulating the use of non-compete and non-solicit covenants. The law establishes bright-line, compensation-based rules regarding which employees can be required to sign such covenants and creates a mandatory pre-signature process designed to protect employees. The statute also codifies existing Illinois case law on the enforceability of such covenants without changing it substantially.

Effective date: The law applies only to agreements signed on or after January 1, 2022.

Bright-line Rules Regarding Covered Employees: The law establishes the following rules:

• Employees making $75,000 or less cannot be required to sign a “covenant not to compete.”
• Employees making $45,000 or less cannot be required to sign a covenant not to compete OR a “covenant not to solicit.”
• Certain employees in construction and public employees covered by a collective bargaining agreement cannot be required to sign a covenant not to compete.

Procedural Protections for Employees: The law creates requirements relating to the process of having employees sign covenants. An employer that does not comply with these requirements cannot enforce the covenant against the employee:

• The employer must advise the employee in writing to consult with an attorney.
• The employer must either (a) provide a copy of the covenant to the employee 14 calendar days before his or her first day or (b) give the employee 14 days to decide whether to sign.
• Employees can waive the 14-day period and sign before the period has run.

Clarifying & Standardizing Illinois Law: The law does not make significant substantive changes to Illinois case law on non-competes and non-solicits, but tries to clarify and standardize certain rules:

• Illinois courts have reached varying conclusions regarding what length of “continued employment” will be adequate consideration for enforcement of a covenant. The new law resolves this uncertainty and specifies that 2 years’ continued employment will suffice. Alternatively, the employer may provide “additional professional or financial benefits” or a combination of continued employment and such benefits. The law does not specify what benefits will suffice.
• The law continues in place (but standardizes) Illinois case law on the test for enforceability of a covenant, including that the covenant must be “no greater than is required for protection of a legitimate business interest of the employer.”
• The law also continues the rule that courts can reform – but not entirely rewrite – an overly broad covenant or sever unreasonable clauses and enforce the remaining provisions, particularly if agreement specifies that it may by modified by a court.

COVID-19 Lay Off Protections: The law also protects employees who are being laid off or furloughed due to the COVID-19 pandemic or similar future circumstances. An employer may not enter into a non-compete or non-solicit with an employee losing his or her job due to such a pandemic unless the separation agreement continues the employee’s base salary for the period of the non-compete or non-solicit (less compensation earned through subsequent employment).

Certain Agreements Excluded: The requirements of the new law do not apply to non-competes entered into by a person buying or selling the goodwill of a company or otherwise acquiring or disposing of an ownership interest in a company. The new law also does not apply to confidentiality/non-disclosure provisions, invention assignment agreements or garden-leave provisions.

Levelling the Playing Field: The law also contains important new provisions designed to level the playing field between employees and employers. Perhaps most importantly, it specifies that an employee who prevails in a suit by an employer to enforce a covenant will be entitled to have his or her attorneys’ fees paid by the employer. It also codifies the Illinois Attorney General’s authority to investigate and bring civil enforcement actions against employers engaged in a “pattern or practice” prohibited by the new law.

Action Items for Employers: Employers need to prepare for these changes – in particular, the process-related requirements that employees be given 14 days to consider whether to sign a covenant and be advised in writing to consult with an attorney, as well as the prohibition on using non-competes with employees making under $75,000 and non-solicits with employees making under $45,000.

This includes employers with a national workforce who have employees in Illinois. While the new statute does not contain a California-style ban on a choice-of-law clause specifying that another state’s law will govern the agreement, employers have to expect that Illinois courts will apply the statute to Illinois employees.

Employers also must continue to use the narrowest possible covenants. The statute does not change Illinois law that a covenant can be no broader than reasonably necessary to protect the employer’s legitimate business interest, meaning that employees will continue to be able to challenge covenants on the grounds they are overly broad – for example, non-solicits that prohibit solicitation of “all” customers. If anything, the statute may make Illinois courts more reluctant to enforce or reform overbroad restrictions, particularly if the agreement does not contain a provision like the one referred to in the new statute in which the parties agree to reformation or partial enforcement by a court.

Additional Takeaways and Possible Subjects of Future Litigation: While these are important changes, the new Illinois statute does not go as far as some other states in terms of banning or severely limiting the use of non-competes and non-solicits. The law clearly tries to strike a balance between the interests of employees and employers and focuses primarily on cutting back on the use of covenants with employees making comparatively modest compensation.

Although the statute by and large does a good job clarifying some disputed points under Illinois law – particularly concerning the length of continued employment required as consideration – the new statute (perhaps unavoidably) leaves some points unresolved that may be the subject of litigation.

• The statute is not crystal clear on whether it applies to independent contractors. It defines “employee” as “any individual permitted to work by an employer in an occupation,” which is ambiguous. An earlier version of the bill, however, incorporated the Illinois Wage Payment and Collection Act’s definition of employee, which excludes independent contractors. This move away from a definition excluding independent contractors suggests that the final version was intended to include independent contractors. On balance, employers would be wise to assume that the new law applies to independent contractors.
• The new statute retains the long-standing and confusing requirement that the covenant be “ancillary to a valid employment relationship.” It is not clear what this is intended to add, especially in light of the fact that the statute, by definition, applies only to covenants signed by employees. It may support an argument that independent contractors are not covered by the statute.
• Some covenants prohibit an employee from accepting business from the former employer’s customers for a period of time. It is unclear whether such a “no-accept,” which is something of a hybrid provision, constitutes a non-compete or a non-solicit under the new law or possibly isn’t covered at all.
• The attorneys’ fees provision in the new law does not define what it means for an employee to “prevail” in a case brought by the employer. If the employer seeks to enforce an agreement that has both a non-compete and a non-solicit and only obtains enforcement of the non-solicit, has the employee “prevailed?”

Illinois courts will no doubt be called upon to clarify these ambiguities in future litigation. That said, the new statute provides welcome clarity on a number of issues that have vexed employers seeking clear rules on covenants.

James L. Komie is an attorney with Howard & Howard in Chicago, IL. He regularly writes and speaks on new developments and trends in the law regarding non-competes and trade secrets, as well as issues relating to the financial services industry.