Companies that use non-compete agreements and restrictive covenants should be familiar with several recent changes that occurred in Illinois law. While the Illinois Freedom to Work Act previously only applied to non-compete agreements for low wage workers earning less than $13 per hour or minimum wage, a new amendment has created a higher compensation threshold. Notably, the changes impose various new challenges for employers and can significantly limit their ability to bind employees to these types of agreements.
A non-compete agreement is a contract entered into between an employer and employee where the employee agrees not to work for a competitor during their employment with the company, or for a period of time thereafter. These types of agreements are typically entered into at the beginning of an employment relationship.
The contents of a non-compete agreement can vary, depending on the type of company. However, it usually prohibits an employee from working for a competing company, forming a competing company, or developing competing products. Additionally, such an agreement might prevent an employee from recruiting their former coworkers and colleagues to join the new business — this can also be addressed in a non-solicitation agreement.
Business owners should be aware of a new law that went into effect in the beginning of 2022 that restricts the use of non-compete agreements in Illinois. Pursuant to the Freedom to Work Act, employers are prohibited from entering into a non-compete agreement with an employee, unless their annual earnings exceed $75,000. This amount will increase to $80,000 in 2027 and will continue to increase by $5,000 every five years until 2037. The law specifies that any “covenant not to compete” entered into that fails to meet the earnings threshold will be deemed void and unenforceable.
Under the terms of the Act, a “covenant not to compete” is one that restricts an employee from performing work for another employer for a specified period of time or in a specified geographical area. The definition also includes work performed for an employer similar to work for the employer who is a party to the agreement — and any terms that would impose adverse financial consequences on the former employer for engaging in competitive activities after termination.
The updated law also imposes restrictions on non-solicitation agreements entered into after January 1, 2022. Non-solicitation agreements are restrictive contracts that prohibit an employee from soliciting their former company’s employees or clients. Critically, Illinois employers are now prohibited from entering into these types of agreements with employees who make a salary of less than $45,000 per year. This threshold increases to $50,000 in 2027 and goes up to $52,500 in 2032.
Although the amendment to the Freedom to Work Act has resulted in some sweeping changes for employers, it’s important to understand that the new law does not apply to certain agreements. The Act is not applicable to confidentiality agreements, agreements prohibiting the disclosure of trade secrets, or restrictive covenants in connection with a business acquisition. In addition, non-compete agreements are generally prohibited in the construction industry and individuals covered by collective bargaining agreements. However, individuals who are shareholders or partners in a construction company may be asked to sign a non-compete.
Illinois employers should also be mindful of the following when drafting non-compete and non-solicitation agreements:
Non-compete and non-solicit agreements are illegal and void if the employee does not receive adequate consideration and the agreement is not supported by a valid employment relationship. The covenant must also not be greater than required to protect a legitimate business interest and cannot impose an undue hardship on the employee.
If you own a company, it’s crucial to ensure all your employment contracts comply with the new laws. It’s best to have an experienced business law attorney by your side to advise you regarding these matters. Located in Rolling Meadows, Litico Law Group is dedicated to serving the legal needs of business owners and entrepreneurs in Illinois. We welcome you to contact us by filling out our online form or calling 847-307-5942 to schedule a consultation to learn how we can assist you.
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