Restrictive covenants are contractual agreements between employers and employees that limit the employee’s ability to compete with the employer after the employment relationship has concluded. These agreements come in various forms, but two of the most common types are non-compete and non-solicitation agreements. In Illinois, a restrictive covenant agreement is governed by restrictive covenant law, which has seen some significant changes in recent years.
As of January 1, 2022, the enforceability of restrictive covenants is subject to an employee’s annualized rate of earnings, which includes the employee’s base salary. The employee’s base salary threshold for enforceability begins at $75,000 per year and increases by $5,000 every five years, reaching $90,000 on January 1, 2037. There are exceptions to these restrictions, depending on the specific business circumstances, such as agreements entered into in connection with the sale of a business or dissolution of a partnership.
Illinois employers looking to safeguard their interests must keep up with the latest regulations and exceptions related to restrictive covenants, paying close attention to any guidance from the Illinois Attorney General.
Non-Compete Agreements
Non-compete agreements are legally binding documents or clauses in a contract that prevent an individual from engaging in competitive activities against their employer during or after the period of employment, also known as subsequent employment. These agreements serve to protect an employer’s confidential information, trade secrets, and other proprietary information from being used by a former employee to compete with the employer, potentially providing professional or financial benefits to the employee or a competitor.
In Illinois, non-compete agreements are generally considered valid and enforceable if they are reasonable in terms of scope, duration, and geographic area, and are supported by adequate consideration and do not contravene public policy. Therefore, employers have a responsibility to accurately draft their non-compete agreements and ensure they comply with Illinois law.
Non-Solicitation Agreements
Non-solicitation agreements are contractual arrangements that restrict an employee from approaching an employer’s customers or clients for their own benefit or for that of a competitor. This type of agreement may include provisions such as requiring advance notice before the employee contacts clients or customers. Non-solicitation agreements play a vital role in protecting businesses from unfair competition by prohibiting employees from leveraging confidential information or customer relationships for the benefit of a competitor, potentially providing financial benefits to the employee or the competitor.
In Illinois, non-solicitation agreements are typically enforceable, provided they are reasonable in scope and duration and supported by adequate consideration, which may include salary increases, bonuses, or other forms of remuneration that constitute adequate consideration.
A combined effort from employers and employees is necessary to draft non-solicitation agreements reasonably and to comply with relevant laws and regulations, ensuring the employee remains employed.
Illinois Freedom to Work Act
The Illinois Freedom to Work Act (IFWA) has had a significant impact on the enforceability of restrictive covenants in the state. This legislation outlines the regulations for restrictive covenant agreements that financial services employers have implemented to safeguard their trade secrets, confidential information, and customer goodwill. The IFWA has introduced new regulations for agreements containing restrictive covenants and has formalized standards and limitations specifically for non-solicitation covenants.
Notable provisions applicable to members of the financial services industry include the employee’s right to recover their attorneys’ fees and costs if they are successful in any civil court or arbitration action brought by their employer to enforce a restrictive covenant.
Given the new law, Illinois employers are advised to thoroughly examine their restrictive covenant agreements, especially those involving an employee requiring advance notice, and prepare for the transition to the new legal standards from 2022 onwards.
Adequate Consideration and Enforceability
Adequate consideration is a key factor in determining the enforceability of restrictive covenants in Illinois. It is based on the idea that an employer must offer something of value to an employee in exchange for the employee consenting to a restrictive covenant, which may take the form of a salary increase, a bonus, or other forms of remuneration.
The salary threshold for enforcing restrictive covenants in Illinois has been set at $75,000 per year, with the threshold increasing by $5,000 every five years until it reaches $90,000 on January 1, 2037. The International Federation of Worker’s Association (IFWA) considers a low-wage employee to be someone whose earnings are below $13/hr or the federal, state, or local minimum wage required by law. This definition provides a standardized approach to identifying low wage employees who earn a lower wage.
As of January 1, 2022, in Illinois, adequate consideration for a non-compete or non-solicit agreement must include either the employee working for the employer for a minimum of two years following the signing of the agreement containing the covenant not to compete or covenant not to solicit, or the employer providing consideration adequate to support the agreement not to compete or not to solicit.
Enforcement of Restrictive Covenants
In Illinois, the courts are responsible for enforcing restrictive covenants. The requirements for enforceability of restrictive covenants in Illinois include:
- The covenant being ancillary to a valid employment relationship
- Employers providing written notice to employees to consult an attorney prior to signing
- Employees being given at least 14 days to review the covenant
- Non-solicitation covenants being enforceable after the employee’s expected annual earnings exceed $45,000
The court will assess the validity of the covenant and the remedies available in the event of a breach.
Remedies for violations of restrictive covenants in Illinois include injunctive relief, damages, and attorney’s fees. Recent developments and Illinois Supreme Court decisions have had a significant impact on the enforceability of restrictive covenants in the state, such as the Illinois Supreme Court’s decision in the case of Kelsay v. Motorola, Inc., which determined that an employer must provide adequate consideration for a restrictive covenant to be legally binding.
Factors Affecting Enforceability
The enforceability of restrictive covenants in Illinois can be affected by a variety of factors, including reasonableness and considerations related to public policy. One essential aspect to consider is narrow tailoring, which ensures that a restrictive covenant is suitably adapted to the particular circumstances of the parties involved. It entails evaluating the scope of the restriction, the duration of the restriction, and the geographic area of the restriction.
The concept of reasonableness requires a court to evaluate whether a restrictive covenant is reasonable when taking into account the circumstances of the parties involved. This involves examining the extent of the restriction, the duration of the restriction, and the geographical area of the restriction. Adequate consideration is another crucial factor in determining the enforceability of restrictive covenants in Illinois, requiring the court to evaluate whether the parties involved have offered sufficient consideration for the restrictive covenant.
Protecting Trade Secrets and Confidential Information
Restrictive covenants can be an effective tool for protecting trade secrets and confidential information in Illinois. The process of recognizing and safeguarding trade secrets and confidential information involves:
- Appraising the value of the information
- Ascertaining who has access to the information
- Evaluating the extent to which the information is kept confidential
To maintain the confidentiality of trade secrets and confidential information, it’s advisable to restrict access to the information, protect it with encryption and passwords, and establish policies and procedures to ensure its confidentiality.
The Illinois Trade Secrets Act is a state law that provides civil remedies for the misappropriation of trade secrets and confidential information, offering a cause of action for the misappropriation of such information.
Recent Developments and Illinois Supreme Court Decisions
Recent legal developments and Illinois Supreme Court decisions have significantly shaped the enforceability of restrictive covenants in the state. For instance, the Illinois General Assembly introduced comprehensive modifications to Illinois law concerning employee restrictive covenants in August 2021. Additionally, the Illinois Supreme Court declined to grant a petition for leave to appeal in Fifield, which addressed amendments to restrictive covenants during the term of employment.
In December 2011, the Illinois Supreme Court resolved a divergence in appellate courts and declined to employ rigid tests to evaluate restrictive covenants. These decisions and developments highlight the importance of staying informed about the latest legal changes and how they impact the enforceability of restrictive covenants in Illinois.
Tips for Employers and Employees
In the process of drafting, negotiating, and enforcing restrictive covenants in Illinois, it’s important for both employers and employees to understand the legal landscape, as well as their individual rights and obligations. Employers should ensure their restrictive covenants are properly drafted, compliant with Illinois law, and provide employees with the necessary information and time to review the covenant.
Employees, on the other hand, should carefully review the terms of any restrictive covenant they are asked to sign and consult with an attorney if necessary. Additionally, both parties should work together to maintain the confidentiality of trade secrets and confidential information by utilizing confidentiality agreements, non-disclosure agreements, and other protective measures. For more information on Employment law in Illinois, read our article, Employment Contracts: Essential Terms, Negotiation Tips, and Enforceability.
While we serve most of Illinois, if you’re in the Downers Grove, IL area and are looking for an experienced employment law attorney to assist you, please feel free to reach out to O’Flaherty Law at:
O'Flaherty Law of Downers Grove
4949 Forest Ave., Ste. 1B, Downers Grove, IL 60515
(630) 687-6993
downersgrove@oflaherty-law.com
https://www.oflaherty-law.com/areas-of-law/downers-grove-attorneys
Disclaimer: The information provided on this blog is intended for general informational purposes only and should not be construed as legal advice on any subject matter. This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship. Each individual's legal needs are unique, and these materials may not be applicable to your legal situation. Always seek the advice of a competent attorney with any questions you may have regarding a legal issue. Do not disregard professional legal advice or delay in seeking it because of something you have read on this blog.
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