Several bills are pending in the Illinois House of Representatives and Senate that, if signed into law, could radically change the landscape of the use of covenants not to compete and covenants not to solicit in Illinois. Employers should be aware of this pending legislation because, if passed, it could have serious ramifications for businesses in Illinois.
House Bill 3066 proposes to amend the Illinois Freedom to Work Act to restrict the use of covenants not to compete and covenants not to solicit. While this bill seeks merely to only allow for the use of restrictive covenants with employees earning over a certain threshold annual amount, one House Bill and one Senate Bill seek to prohibit the use of covenants not to compete in their entirety.
Here is a summary of some of the proposed amendments involving covenants not to compete and covenants not to solicit in House Bill 3066:
Restrictions apply based on employee compensation: The use of covenants not to compete and covenants not to solicit can only be used with employees earning in excess of a certain annual dollar amount.
- A covenant not to compete will not be valid unless the employee’s actual or expected annual compensation exceeds $75,000 per year. The $75,000 threshold will increase to $80,000 on January 1, 2027; to $85,000 on January 1, 2032; and to $90,000 on January 1, 2037.
- A covenant not to solicit will not be valid unless the employee’s actual or expected annual compensation exceeds $45,000 per year. The $45,000 threshold will increase to $47,500 on January 1, 2027; to $50,000 on January 1, 2032; and to $52,500 on January 1, 2037.
- A covenant not to compete will not be valid if an employee is terminated or furloughed as a result of “business circumstances or governmental orders” unless the employee is paid his or her base salary for the term of the restricted period, minus any compensation earned from subsequent employment. A separate House Bill (HB 4007) would require that the employee be paid “full compensation” during this period, including all benefits the employee would have received had employment not been terminated, until the time for the covenant not to compete has expired or the employee gains full-time employment at a commensurate rate of pay and benefits.
Codification of existing Illinois case law: The bills propose to codify existing case law in Illinois regarding restrictive covenants. Specifically, the bills provide that a covenant not to compete or a covenant not to solicit is not valid unless:
- The employee receives adequate consideration, which is defined as (1) the employee working for the employer for at least two years after the employee agreed to the restrictions or (2) the employer otherwise provided consideration adequate to support the agreement, which could consist of the period of employment plus additional consideration or merely other consideration adequate by itself;
- The covenant is ancillary to a valid employment relationship;
- The covenant is no greater than is required for the protection of a legitimate business interest of the employer;
- The covenant does not impose undue hardship on the employee; and
- The covenant is not injurious to the public.
Employee to receive prior notice of restrictions. A covenant not to complete and a covenant not to solicit is not valid unless the employee is provided with a copy of the covenant(s) at least 14 days before the commencement of employment and the employer advises the employee in writing to consult with an attorney before agreeing to the covenant(s).
Employee entitlement to attorneys’ fees: In the event of litigation, if an employee prevails on a claim brought by the employer to enforce a restrictive covenant, the employee shall be eligible to recover from the employer all costs and reasonable attorneys’ fees.
Doing away with covenants not to compete: Unlike the bill outlined above, House Bill 3449 and Senate Bill 1838 would prospectively prohibit the use of covenants not to compete in agreements between employers and employees. This is different from House Bill 3066, which seeks to limit the use of covenants not to compete with employees who earn below a certain threshold amount. The Senate Bill does not currently address covenants not to solicit.
Covenants not to compete and covenants not to solicit play an important role in protecting businesses and allowing for fair competition. While no one wants to prevent someone from earning a living and seeking other employment, there are circumstances in which an employee should not be able to do that if doing so would unfairly injure the previous employer. That is where carefully drafted restrictive covenants are necessary and appropriate. The pending bills seek to draw lines and put unfair one-size-fits-all constraints on employers.