Employment Law Alert

2022 Ushers in Sweeping Restrictions on Non-Competition and Non-Solicitation Agreements

January 5, 2022


For those employers looking to think, talk and worry about something besides COVID-19, we have just the topic: the Illinois Freedom to Work Act.   In August 2021, Governor Pritzker signed into law an amendment to the Act that imposes new restrictions on non-competition and non-solicitation agreements.  Here’s what the Omicron variant and vaccine mandates caused you to miss.

Defining Moment

The Freedom to Work Act, which took effect on January 1, 2022, imposes new restrictions on when employers can utilize non-competition and non-solicitation agreements, what employers must provide to employees to make such agreements enforceable, and when courts will enforce the agreements.

The Act defines “covenant not to compete” as an agreement between an employer and an employee entered into after January 1, 2022 that restricts the employee from performing: (1) any work for another employer for a specified period of time; (2) any work in a specified geographical area; or (3) work for another employer that is similar to the employee’s work for the employer that is a party to the agreement.  The definition also includes an agreement between an employer and an employee that imposes adverse financial consequences on the former employee if the employee engaged in competitive activities after the termination of the employee’s employment with the employer.

A “covenant not to solicit” is defined as an agreement between an employer and an employee entered into after January 1, 2022 that: (1) restricts the employee from soliciting for employment the employer’s employee or (2) restricts the employee from soliciting, for the purpose of selling products or services of any kind to, or from interfering with the employer’s relationships with, the employer’s clients, prospective clients, vendors, prospective vendors, suppliers, prospective suppliers, or other business relationships.

Show Me the Money

One of the most significant changes imposed by the Act is the requirement that employees must meet certain “earnings” thresholds before employers can impose non-competition and non-solicitation agreements. The definition of “earnings” includes all forms of earned compensation (i.e. salary, bonuses, tips, etc.) reported on the employee’s IRS Form W-2, plus any elective deferrals not reported as wages, such as contributions to a 401(k) plan.

Under the Act, non-competition agreements are prohibited unless an employee has actual or expected earnings of $75,000 per year; non-solicitation agreements are prohibited unless an employee has actual or expected earnings of $45,000 per year. These amounts increase by $5,000 every five calendar years until the thresholds of $90,000 and $52,500 are reached for each respective type of agreement.

In addition to meeting the salary threshold, employers must provide “adequate consideration” before either type agreement is enforceable.  The Act defines “adequate consideration” as either: (1) two years of continued employment with the employer after the employee signs the agreement, or (2) a “period of employment” plus additional professional or financial benefits, or merely professional or financial benefits that are “adequate by themselves.” Neither “period of employment” nor “adequate by themselves” is defined by the Act.

You’ll Be Hearing From My Lawyer

That’s not all.  In order for the agreements to be enforceable, the employer must also establish that the restrictions in the agreement: are ancillary to a valid employment relationship; are no greater than is required for the protection of a legitimate business interest of the employer; do not impose undue hardship on the employee, and; are not injurious to the public.

The Act also requires employers to advise employees in writing to consult with an attorney before entering into the Agreement.  Employees also must be given at least 14 calendar days to review the agreement before signing, though an employee can voluntarily elect to sign the agreement before the expiration of the 14-day period.

I Thought You Said I Didn’t Have to Think About COVID?

The Act also includes other restrictions that employers need to have on their radar.  Non-competition and non-solicitation agreements are prohibited for employees who are terminated, furloughed or laid off as a result of a business circumstance or governmental order related to the COVID-19 pandemic or any similar pandemic, unless the employer chooses to pay the employee’s base salary through the restricted period.

These agreements are also prohibited with employees covered by collective bargaining agreements under the Illinois Public Relations Act or the Illinois Education Labor Relations Act, and any employees employed in construction, except such employees who primarily perform management, engineering or architectural, design or sales functions, or who are shareholders, partners, or owners in the employer.

Vaccine Mandates Seem Less Complicated Than This

There’s no sugarcoating it: The Act significantly impacts the use of non-competition and non-solicitation agreements, and employers need to ensure any such agreements are compliant with the requirements of the Act.  Just in case employers needed another reason to have to call their employment counsel.

Please contact Steve BrennemanKelly Smith Haley, Brandon Liss, or the Fox Swibel attorney with whom you regularly work to address these issues.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances.  Under applicable rules of professional conduct, this content may be regarded as attorney advertising.
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