The Illinois legislature is once again setting its sights on covenants not to compete. In 2016, Illinois enacted the “Illinois Freedom to Work Act,” prohibiting employers from entering into covenants not to compete with “low wage” employees. In February 2020, Illinois legislators filed four bills targeting covenants not to compete for all Illinois employees.
SB 3021 and HB 4699 are identical in substance, and the most drastic. These bills seek to prohibit all covenants not to compete in Illinois: “… no employer shall enter into a covenant not to compete with any employee of the employer.” [Emphasis added]. These bills define “employee” as “any individual permitted to work by an employer” – not just Illinois-based employees – raising extraterritoriality issues off the bat. An identical bill prohibiting covenants not to compete for all Illinois employees was defeated in the Illinois House of Representatives in 2019, 62 to 37, with 3 “Present” votes.
HB 5454 purports to require an employer “that elects to enforce a covenant not to compete” to pay “full compensation, including all benefits” to employees during either “(1) the time specified in the covenant not to compete or (2) until the separated employee is employed full-time at a commensurate rate of pay and benefits in a field of work not subject to the covenant not to compete.” However, this bill would simply add a new section to the Illinois Freedom to Work Act, which defines a “covenant not to compete” as “an agreement between an employer and a low-wage employee,” and declares any such agreement illegal and void. HB 5454 thus seems fundamentally flawed on its face, because it is limited to covenants not to compete with low-wage employees, which are already illegal and void. Setting that fixable point aside, this bill follows the lead of Massachusetts’ non-competition agreement statute in requiring garden leave-type compensation during the restricted period.
HB 3430 is the most comprehensive of the February 2020 bills. This bill:
- Defines “covenant not to compete” to include agreements that “impose adverse financial consequences on a former employee” for competitive activities;
- Defines “employee” in accordance with the Illinois Wage Payment and Collection Act, which excludes independent contractors;
- Codifies the common law requirements that an employee receive adequate consideration, and that the covenant be ancillary to a valid employment relationship;
- Defines “consideration” as either two years of employment, or “some other fair and reasonable consideration specifically bargained for in exchange for the covenant not to compete” (a clear nod to Fifield v. Premier Dealer Services, 2013 IL App (1st) 12037, 993 N.E.2d 938);
- Codifies the common law requirements set forth in Reliable Fire v. Arredondo, 2011 IL 111871, 965 N.E.2d 393, that the covenant (i) is not greater than required for the protection of a legitimate business interest, (ii) does not impose undue hardship on the employee, and (iii) is not injurious to the public;
- Further codifies Reliable Fire by specifying that “whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case,” including, but not limited to, “the near-permanence of customer relationships, the employee’s acquisition of confidential information through the employee’s employment, and time and place restrictions”;
- Imposes notice requirements similar to those of the federal Older Workers Benefit Protection Act such as requiring employers to advise employees in writing to consult with an attorney before signing, and providing a copy of the convent agreement at least 10 business days before employment, or providing the employee 21 days to review the covenant before signing; and
- Permits employees to recover costs and reasonable attorney’s fees if they prevail in an action initiated by an employer involving a covenant not to compete.
SB 3430 leaves some key questions unanswered – two questions that immediately come to mind are: Does a “covenant not to compete” include client solicitation restrictions; and what qualifies as “some other fair and reasonable consideration”? However, SB 3430 is the most thorough recent legislative attempt to govern covenants not to compete in Illinois.
We will keep tabs on these bills and apprise you of their progress.