Sharp  Thinking

No. 199  _   Perspectives on Developments in the Law from Sharp-Hundley, P.C.   _August 2021

New Law Limits Restrictive Employment Covenants

 

By Alexis Wiggley, alexis@sharp-hundley.com

Illinois Gov. J.B. Pritzker this month approved legislation to expand the Illinois Freedom to Work Act (820 ILCS 90) to limit employers from creating and enforcing covenants not to solicit and covenants not to compete with employees under certain salary levels.  Signed by Pritzker August 13, the law is set to become effective on January 1, 2022.

In the past, a restrictive covenant ancillary to an employment relationship has been enforceable “if the covenant: (1) is no greater than is required for the protection of a legitimate business interest of the employer-promisee; (2) does not impose undue hardship on the employee-promisor, and (3) is not injurious to the public.”  Reliable Fire Equip. Co. v. Arredondo, 2011 IL 111871.  A covenant not to compete and a covenant not to solicit are both restrictive covenants.

Terms Defined:  The new law defines a covenant not to compete as an agreement between an employer and an employee that restricts the employee from working in a specified geographical area, for another employer for a specified time, or for another employer where the work would be similar to that done for the employer that is a party to the agreement.  Public Act 102-0358, § 5.  It defines a covenant not to compete as an agreement that imposes adverse financial consequences on the former employee after termination of the employee’s employment if the former employee engages in competitive activities.  Id.  Covenants not to compete may only be permitted and enforceable for employees whose actual or expected annualized pay exceeds $75,000.  § 10(a).  However, that figure will increase in $5,000 increments in 2027, 2032 and 2037.

With respect to individuals in collective bargaining agreements under the Illinois Public Labor Relations Act (5 ILCS 315) or the Illinois Educational Labor Relations Act (115 ILCS 5) and some individuals employed in construction, a covenant not to compete will be illegal.  § 10(d).  Covenants not to complete with construction employees who primarily perform management, engineering, or architectural, design, or sales functions are legal.  Id.  Additionally, covenants not to compete with individuals who are shareholders, partners or owners are legal.  Id.

The new law defines a covenant not to solicit as an agreement between an employer and an employee that restricts an employee from soliciting other employees to leave their employer and work for or with them.  § 5.  Also, a covenant not to solicit can be an agreement that restricts the employee from soliciting the employer’s current or prospective clientele, vendors, suppliers or other business contacts.  Id.  Covenants not to solicit may be enforceable only for employees whose actual or expected annualized pay exceeds $45,000.  § 10(b).  However, that figure will increase in $2,500 increments in 2027, 2032 and 2037.  Id.

Highlighting Alexis Wiggley

Alexis M. Wiggley, member of the Missouri and Illinois bars, has joined Sharp-Hundley, P.C.

Ms. Wiggley, a 2020 graduate of the Washington University School of Law in St. Louis, MO, is a former staff editor for Washington University’s Global Studies Law Review.  She was awarded a certificate in business law and was treasurer of the Black Law Student Association.

She was awarded the degree of Bachelor of Arts in financial economics and political science with highest honors from Moravian College in Bethlehem, PA, in 2017.

Ms. Wiggley concentrates her practice in business entity formation, real estate, and general business law.

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Legal Prerequisites:  Covenants not to complete and not to solicit may be legal only if “(1) the employee receives adequate consideration, (2) the covenant is ancillary to a valid employment relationship, (3) the covenant is no greater than is required for the protection of a legitimate business interest of the employer, (4) the covenant does not impose undue hardship on the employee, and (5) the covenant is not injurious to the public.”  § 15.  Additionally, the employer must advise the employee in writing to seek counsel before entering into the covenant and must allow the employee to review the covenant for 14 days or provide the covenant 14 days prior to beginning employment.  § 20.

With regard to former employees that have been terminated, furloughed or laid off, an employer generally may enter into a covenant not to compete only if it includes compensation equivalent to the former employee’s base salary when the employee was employed by the employer less compensation the terminated employee earns at the new employer during the duration of the covenant not to compete.  § 10(c).  An employer may not enter into a covenant not to solicit with an employee it terminates or furloughs or lays off as a result of business circumstances or governmental orders or similar circumstances to the COVID-19 pandemic.  Id.

Blue-Penciling Permitted:  When a court decides whether to enforce a restrictive covenant, the court may consider several factors in determining the employer’s legitimate business interest, including “the employee’s exposure to the employer’s customer relationships or other employees, the near-permanence of customer relationships, the employee’s acquisition, use or knowledge of confidential information through the employee’s employment,” and the scope of restrictions for time and location.  § 7.  The court may reform or sever provisions to allow portions of a covenant to be enforceable based on fairness, good-faith efforts and other factors.  § 35(b).

Clearly, it is imprudent for an employer to violate the Freedom to Work Act.  Where an employer brings a suit to enforce a covenant and loses, the employer must pay the employee’s costs and reasonable attorney’s fees incurred in defending the action.  § 25.  Moreover, if an employer is reasonably believed to be engaging in patterns that violate the new law, the employer will risk the Attorney General initiating a civil action to obtain appropriate relief, among other penalties and adverse consequences.  § 30(a).