Are you concerned that a new (or existing) employer will require you to sign a non-compete/solicit? Do you have non-solicit or non-compete restrictions from a former employment or severance agreement, and questions about the validity and scope? Is a prospective employer afraid to hire you because of your restrictive agreement?
On January 1, 2022, employees gained more protection under the Illinois Freedom to Work Act. The amendments apply to employment-related agreements signed on or after January 1, 2022. These include NDA/confidentiality/restrictive covenant agreements, offer letter/employment agreements, incentive agreements, and severance agreements with those clauses. Independent contractor agreements, confidentiality/NDA clauses, and other restrictions like IP and non-disparagement are outside the law’s scope.
Much of the new law codifies years of Illinois case law, which includes the key factor of adequate legal “consideration” (something of value) given to the employee. The focus is on at-will employees, i.e. those whose employment can be terminated at any time, by either the employee or the employer, without any reason or notice. The rule is that unless a new or existing at-will employee receives adequate legal consideration for signing the agreement, the employer can’t enforce the non-compete/non-solicit clauses unless and until the employee works for at least 2 years after signing.
The courts’ rationale? It is unfair that an at-will employee could be required to sign an agreement, be fired at will a few months later, and then bound by these restrictions. The new law formalizes the 2-year rule.
What is “adequate consideration?” The statute “defines” it as “a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.” Unfortunately, the new law does not define what “additional professional or financial benefits” means, or which “merely professional or financial benefits” are by themselves adequate. Perhaps this is our legislature’s way of subtly approving historically used consideration like signing bonuses, equity grants, the opportunity for severance compensation, or special perks.
New to Illinois law are the minimum annual earnings thresholds. Only employees with actual or expected annual earnings of $75,000 can be subject to non-competes. It’s $45,000 for non-solicits. These floors will increase every 5 years until they reach $90,000 and $52,500, respectively, by 2027. “Earnings” includes any compensation that would show up on a Form W-2, including salary, earned bonuses and commissions, and tips, as well as any elected deferrals, like employee 401(k) plan contributions.
Candidates and employees have notice and review rights now. The employer (and agreement) must provide 14 days prior to the start date or the contract signing date to review the agreement, as well as the right to seek advice from an attorney. If your offer letter indicates that you will be required to sign an NDA or restrictive agreement, ask for a copy and review it with an attorney BEFORE you accept the offer. Know what you are expected to sign before taking that position. The agreement may be overbroad and so burdensome that it could severely impact your future opportunities, and while the new law permits courts to modify provisions in order to enforce, we can’t predict what a court might do. Some employers are amenable to negotiation and modification – best to try and protect yourself at the front end, rather than risking forced restrictions via a severance agreement.
Employers must also think twice now about pursuing legal action to enforce non-compete/solicits. If the company sues a former or current employee to enforce and loses, the company must pay the individual’s attorneys’ fees. However, the agreement usually makes the employee liable for the company’s fees and costs if the employer proves a breach.
Of course, employers frequently sue both the former employee and the new/prospective employer to stop an allegedly competitive hire or solicitation or disclosure of confidential information. It’s crucial to disclose your restrictions to the new/prospective employer (if they don’t ask first.) Just as the individual should get attorney review regarding your rights and obligations, the new employer needs to consult with its attorney to assess risk.
Finally, employees who are furloughed, terminated, or laid off as “the result of business circumstances or governmental orders related to COVID,” can only be subject to the restrictions if the employer pays severance compensation (regular salary) for the entire restrictive period.
As with most laws, many questions are unanswered. How the courts will apply the new law and interpret the definitions remains to be seen. While the statute provides that the amendments are not retroactive, and only apply only to agreements entered in and after 2022, courts may still apply the general principles to older contracts.
So yes, your non-compete may be enforceable; don’t assume it’s not. Protect yourself with proper knowledge and legal review before signing a contract or accepting a new offer that you may regret later.
If you still have questions, feel free to join CRC on March 23 at 6 p.m., when I will present an interactive webinar on Illinois non-compete law.
- Lori Goldstein, Employment Attorney and CRC Board Member
