As previously mentioned, there are currently 45 state bills pending to modify noncompete law across 21 states — as well as two new federal bills, President Biden’s plan to limit the use of noncompetes, and the FTC’s consideration of regulatory limitations.
In this series, we are providing details on all 45 bills (and any new ones that are filed) — and we will be simultaneously updating our Changing Trade Secrets | Noncompete Laws page. Note that the summaries are (sort-of) color coded for the nature of the bill (ban, modification or establishment of standards, reversal of prior changes) and the groups for whom it creates exceptions or specific limitations (medical, low-wage workers, others).
Off we go…
Up today: Illinois.
Illinois has significant legislative activity, including five publicly filed bills as follows:
- HB.789 Amendment (An amendment to replace the entirety of the text of HB.789): Introduced on January 8, 2021, to amend the Illinois Freedom to Work Act by expanding its scope beyond low-wage workers (and raising the minimum compensation thresholds of employees for whom noncompetes, and now nonsolicits, can be used), prohibiting enforcement of noncompetes for someone terminated or furloughed because of COVID-19 or similar events, requiring specified advance notice, adding an “adequate consideration” requirement (as well as otherwise typical standards), and requiring payment of attorney’s fees for a prevailing employee.1 Specifically, the bill (which would apply only to agreements entered into after its effective date) would:
- Remove the definition of “low-wage employee” from the statute and the reference to “low-wage” from the definition of a “covenant not to compete,” thereby expanding the scope of the statute.
- Add to the definition of “covenant not to compete” that it includes “an agreement between an employer and an employee, entered into after the effective date of this amendatory Act . . . , that by its terms imposes adverse financial consequences on a former employee if the employee engages in competitive activities after the termination of the employee’s employment with the employer,” but excludes “(i) a covenant not to solicit [(separately defined to include both typical nonsolicits and no-recruit covenants)], (ii) a confidentiality agreement or covenant, (iii) a covenant or agreement prohibiting use or disclosure of trade secrets or inventions, (iv) invention assignment agreements or covenants, (v) a covenant or agreement entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest, (vi) clauses or an agreement between an employer and an employee requiring advance notice of termination of employment, during which notice period the employee remains employed by the employer and receives compensation, or (vii) agreements by which the employee agrees not to reapply for employment to the same employer after termination of the employee.”
- Prohibit the use of noncompetes for anyone earning — or expected to earn — a minimum of $75,000 (increasing to $80,000 by 2027, $85,000 by 2032, and $90,000 by 2037) in annualized earnings. (“Earnings” are defined to include virtually all compensation received by the employee from the employer.)
- Adopt the totality of the facts and circumstances test from the 2011 Illinois Supreme Court decision in Reliable Fire Equipment Co. v. Arredondo as the standard for determining the existence of a legitimate business interest, including the following factors that may be considered: “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, the time restrictions, the place restrictions, and the scope of the activity restrictions.” The bill is also express that “[e]ach situation must be determined on its own particular facts. Reasonableness is gauged not just by some but by all of the circumstances. The same identical contract and restraint may be reasonable and valid under one set of circumstances and unreasonable and invalid under another set of circumstances.”
- Require the noncompete is supported by “adequate consideration,” which is defined as: “(1) the employee worked for the employer for at least 2 years after the employee signed an agreement containing a covenant not to compete or a covenant not to solicit or (2) the employer otherwise provided consideration adequate to support an agreement to not compete or to not solicit, which could consist of the period of employment plus additional consideration or merely other consideration adequate by itself.”
- Prohibit the use of nonsolicits (both customers, etc., nonsolicits and no-recruit agreements) for anyone earning — or expected to earn — a minimum of $45,000 (increasing to $47,500 by 2027, $50,000 by 2032, and $52,500 by 2037) in annualized earnings.
- Render a noncompete or nonsolicit “illegal and void unless (i) the employer advises the employee in writing to consult with an attorney before entering into the covenant and (ii) the employer provides the employee with a copy of the covenant at least 14 calendar days before the commencement of the employee’s employment or the employer provides the employee with at least 14 calendar days to review the covenant.”
- Render a noncompete “void and illegal for any employee who an employer terminates or furloughs as the result of business circumstances or governmental orders related to the COVID-19 pandemic, or under circumstances that are similar to the COVID-19 pandemic, unless enforcement of the covenant not to compete includes compensation equivalent to the employee’s base salary at the time of termination for the period of enforcement minus compensation earned through subsequent employment during the period of enforcement.”
- Permit something similar to the so-called “purple pencil” approach by saying that “extensive judicial reformation . . . may be against the public policy of this State” (emphasis added), but providing the following detail: “In some circumstances, a court may, in its discretion, choose to reform a covenant not to compete or a covenant not to solicit rather than hold such covenant unenforceable. Factors which may be considered when deciding whether such reformation is appropriate include the fairness of the restraints as originally written, whether the original restriction reflects a good-faith effort to protect a legitimate business interest of the employer, the extent of such reformation, and whether the parties included a clause authorizing such modifications in their agreement.”
- HB.3066 (An Act concerning employment): Introduced on February 18, 2021, is virtually identical to the HB789 amendment (above).2
The bill is pending before the House Labor & Commerce Committee.
- HB.3449 (An Act concerning employment): Introduced on February 19, 2021, would ban all employee noncompetes with immediate effect.
The bill is pending before the House Labor & Commerce Committee.
- SB.1938 (An Act concerning employment): Introduced on February 26, 2021, would ban all employee noncompetes with immediate effect. (SB.1938 is the Senate analogue to H.3449.)
The bill is pending before the Senate Labor Committee.
- HB.4007 (An Act concerning employment): Introduced on March 1, 2021, would require the employee to compensate the employee during the restricted period of a noncompete. Specifically, the bill would:
- Require that “[a]n employer that elects to enforce a covenant not to compete . . . must pay to the employee . . . full compensation, including all benefits, that the employee would have received had his or her employment not been discontinued (1) for 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.”
- Render void a noncompete that the employer attempts to enforce “in a manner that does not comply with” the payment obligations.
The bill is pending before the House Labor & Commerce Committee.
Next up: Iowa.
And, remember, if you want to see a summary of the current noncompete law in any state (and D.C.), please refer to our 50-state noncompete chart, which is updated on a continual basis, as the laws change.
*A huge thank you to Erika Hahn for all of her extraordinary help in tracking the bills.
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1 Oddly, this amendment (HB.789) is not available through the usual sources of pending legislation, though it is publicly filed; hat tip to Christopher Hennessy and Jeremy Glenn of Cozen O’Connor for locating it.
2 HB.3066 is likely intended as the replacement for HB.789, which are almost identical, except that HB.789 references the 101st General Assembly, as opposed to the current 102nd General Assembly (which HB.3066 references).