The Illinois General Assembly passed SB0672 on May 31, 2021, which makes significant changes to the Freedom to Work Act (820 ILCS 90/). As a result, covenants not to compete and covenants not to solicit will be void and unenforceable against a greater scope of employees. The proposed law will take effect on January 1, 2022, and will only apply to restrictive covenants entered into after January 1, 2022. It is anticipated that Governor Pritzker will sign the bill into law sometime in August, 2021.
Income Requirements for Covenants Not to Compete and Covenants Not to Solicit
Under the new law, a covenant not to compete shall be void and unenforceable unless the employee's actual or expected annualized rate of earnings exceeds $75,000 per year on the effective date, January 1, 2022. This increases to $80,000 per year beginning on January 1, 2027, $85,000 per year beginning on January 1, 2032, and $90,000 per year beginning on January 1, 2037.
Also, the new law states that covenants not to solicit shall be void and unenforceable unless the employee's actual or expected annualized rate of earnings exceeds $45,000 per year on the effective date, January 1, 2022, with increases to $47,500 per year beginning on January 1, 2027, $50,000 beginning January 1, 2032, and $52,500 beginning January 1, 2037.
What Constitutes “Earnings” Under the New Law?
The new version of the Freedom to Work Act defines “earnings” as compensation, including earned salary, earned bonuses, earned commissions, or any other form of taxable compensation, reflected or that is expected to be reflected as wages, tips, and other compensation on the employee’s W-2, plus any elective deferrals not reflected as wages, tips or other compensation on the employee’s W-2, such as, without limitation, employee contributions to a 401(k), 403(b), flexible spending account, health savings account, or commuter benefit-related deductions.
Collective Bargaining Agreements and Construction Employees
The new law also provides that a covenant not to compete is void and illegal for individuals covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act, in addition to certain employees in the construction industry. However, construction employees who primarily perform management, engineering or architectural, design, or sales functions for the employer, or who are shareholders, partners, or owners in any capacity of the employer are not covered by this section.
COVID-19 Related Termination or Furlough
The new law protects employees affected by COVID-19. Covenants not to compete and covenants not to solicit are void and illegal for any employee who an employer terminates, furloughs, or lays off as the result of business circumstances or governmental orders related to the COVID-19 pandemic, or under circumstances that are similar to the COVID-19 pandemic, unless the covenant not to compete includes compensation equivalent to the employee's base salary at the time of termination for the period of enforcement minus compensation earned through subsequent employment during the period of enforcement.
Opportunity to Review Covenant Not to Compete and Not to Solicit
Under the new statute, covenants not to compete and not to solicit are illegal and void unless (1) The employer advises the employee in writing to consult with an attorney before entering into the covenant; and (2) The employer provides the employee with a copy of the covenant at least 14 calendar days before the commencement of the employment, or the employer provides at least 14 days to review the covenant.
Employee Remedies
If an employer files a civil action or for arbitration on a claim to enforce a covenant not to compete or a covenant not to solicit and the employee prevails, in addition to the remedies available under any agreement between the employer and employee, or under any other statute, the employee shall also recover all costs and reasonable attorney’s fees.
Judicial Reformation
The new statute acknowledges that extensive judicial reformation of a covenant not to compete or a covenant not to solicit may be against the public policy of Illinois. The statute, nonetheless, permits a court, in its discretion, to reform or sever provisions of a covenant not to compete or a covenant not to solicit rather than hold the entire covenant unenforceable. The statute also lists factors the court may consider when deciding whether to reform or sever the covenant.
Conclusion
These amendments apply to restrictive covenants entered into after January 1, 2022. As a result, employers must ensure that employment contracts executed after that date fully comply with the new law. Also, employers who wish to enter into restrictive covenant agreements prior to the new law taking effect, should contact qualified and experienced labor and employment attorneys to ensure compliance with applicable Illinois law.
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