By: Sally A. Piefer
June 21, 2021
Non-compete and non-solicitation agreements are relatively commonplace. However, these agreements have been under increasing attack by legislatures across the country. President Biden has also expressed that one of the items on his regulatory agenda is to eliminate all non-compete agreements except for those necessary to protect trade secrets.
The Illinois legislature recently unanimously passed legislation changing the non-compete and non-solicitation agreement landscape. The Illinois Governor is expected to sign this legislation which will go into effect on January 1, 2022, and will impact agreements entered into after that date.
The Illinois legislation implements the following changes to non-compete and non-solicitation agreements:
Compensation Thresholds
The legislation voids all non-compete provisions with an employee if the employee has expected earnings below $75,000. The legislation also voids all non-solicitation provisions with an employee if the employee has expected earnings below $45,000.
The expected earnings levels include not only compensation reported on an employee’s W-2, but also elective deferrals such as employee contributions to a 401(k), FSA or HSA. The current earnings thresholds for non-competes will increase by $5,000 every 3 years through 2037 (e.g., on January 1, 2027, the earnings levels increase to $80,000). For non-solicitation provisions, the earnings levels increase by $2,500 every 3 years (e.g., $47,500 on January 1, 2027).
Adequate Consideration
The legislation requires an employer to provide adequate consideration in exchange for signing the agreement and specifically states that 2 years of employment is adequate consideration, but so is a period of employment plus additional professional or financial benefits, or merely professional or financial benefits, such as a signing bonus. Employers should ensure that the consideration being offered is specifically identified in the agreement.
Notice to Employee
Employers must give the agreement to a new employee at least 14 days before the employee starts employment. If an employer misses that window of opportunity, the employee must then be provided 14 days from receipt to sign and return. The employee can sign earlier, but cannot be forced or coerced to do so. The agreement must also advise the employee that he/she may consult with an attorney before signing. An agreement which fails to incorporate these provisions is considered illegal and invalid.
Restrictions on Enforcement
The Illinois legislature has placed several restrictions on enforcing a non-compete or non-solicit provision. For example, an employer cannot enforce a non-compete or non-solicitation clause where the employee is terminated, furloughed or laid off as a result of “business circumstances” or governmental orders relating to COVID 19 or similar circumstances—unless the agreement contains a compensation equivalent to the employee’s base salary at time of termination for the length of enforcement – minus compensation earned by the employee in replacement employment.
In addition, the legislation specifically provides that if an employee prevails in an attempt to enforce a non-compete or non-solicitation clause, the employer has to pay the employee’s reasonable attorney’s fees and costs. While the legislation does not provide a similar statutory provision for the employer, there is no restriction on incorporating such a provision into the agreement.
Attorney General Enforcement
Finally, the new legislation permits the Attorney General to conduct investigations and sue employers if there is a belief that the employer is engaging in a practice in violation of the legislation. In the event of litigation, the Attorney General can seek a temporary restraining order or preliminary injunction preventing the employer from further violations of the law, and it can recover damages, which can include a $5000 civil penalty for each violation (or $10,000 for repeat violations within a 5-year period). Each employee subject to an illegal agreement is considered a separate and distinct violation of the law.
Next Steps
Illinois is not alone. Several other states, including Arizona, Oregon, Nevada and Washington DC have also implemented new legislation in 2021 which may impact the enforceability of non-compete and non-solicitation agreements in those states. Employers with operations in multi-state locations should have their non-compete and non-solicitation agreements analyzed to determine whether these new laws will impact the enforceability of the agreements.
If you have questions about the new law, or any questions about non-compete and/or non-solicitation agreements, please contact Sally Piefer at 414-226-4818 or spiefer@lindner-marsack.com, or contact your regular Lindner & Marsack attorney.