There are two new noncompete laws: Illinois and Nevada. Discussed below, Illinois is completely overhauling its noncompete law starting January 2022. Discussed in the next post, Nevada will have tweaks to its law starting in October of this year.
Before turning to the Illinois update, for those keeping count, there have been 66 noncompete bills in 25 states so far this year1 — excluding the two pending federal noncompete bills, D.C.’s new law to ban most noncompetes and the new bill to amend it (which we will cover shortly), and any proposed bills that may be circulating, but have not yet been filed. Ten bills (in six states2) have died and three (one in each of Oregon, Illinois, and Nevada) have passed — leaving the current tally at 53 noncompete bills still pending in 18 states: Arkansas, Connecticut, Iowa, Louisiana, Massachusetts, Minnesota, Missouri, New Hampshire, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas, Vermont, and West Virginia — plus DC. (We have created a new color-coded map reflecting the on-going updates.)
In this series, we are providing details on all pending 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).
Today’s update: Illinois closed out its legislative session with a brand new comprehensive noncompete reform statute.
By way of a summary, the new law expands the scope of Illinois’s noncompete statute to beyond low-wage workers (though raising the minimum compensation thresholds of employees for whom noncompetes, and now nonsolicits and no-recruit agreements, can be used), to require payment during the restriction for noncompetes, nonsolicits, and no-recruits for someone terminated or furloughed because of COVID-19 or similar events, to require specified advance notice, to add an “adequate consideration” requirement (as well as otherwise typical standards), and to require the payment of attorney’s fees for a prevailing employee.
Specifically, the new law (which applies only to agreements entered into on or after its effective date, i.e., January 1, 2022) does the following:
- Establishes a new standard:
“A covenant not to compete or a covenant not to solicit [(i.e., both nonsolicits and no-recruit agreements)] is illegal and void unless (1) the employee receives adequate consideration [(newly defined)], (2) the covenant is ancillary to a valid employment relationship, (3) the covenant is no greater than is required for the protection of a legitimate business interest of the employer [(newly defined)], (4) the covenant does not impose undue hardship on the employee, and (5) the covenant is not injurious to the public.”
- Expands the scope of the Illinois Freedom to Work Act by removing 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 making the statute applicable to all noncompetes (and nonsolicits and no-recruit agreements).
- Updates and adds to the definition of “covenant not to compete”:
- To include “an agreement between an employer and an employee . . . , that restricts the employee from performing: (1) any work for another employer for a specified period of time; (2) any work in a specified geographical area; or (3) work for another employer that is similar to employee’s work for the employer included as a party to the agreement” or “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.”
- To exclude “(1) a covenant not to solicit [(separately defined to include both typical nonsolicits and no-recruit covenants)], (2) a confidentiality agreement or covenant, (3) a covenant or agreement prohibiting use or disclosure of trade secrets or inventions, (4) invention assignment agreements or covenants, (5) 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, (6) 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 (7) agreements by which the employee agrees not to reapply for employment to the same employer after termination of the employee.” (In English, it excludes NDAs, assignment of invention agreements, noncompetes in connection with the sale of a business, “true” garden leave clauses, and no-rehire restrictions.)
- Bans 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; and “employee” is defined as “any individual permitted to work by an employer in an occupation,” thus likely including independent contractors.)
- Adopts 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 “[n]o factor caries any more weight than any other” and that the “factors are only non-conclusive aids in determining the employer’s legitimate business interest, which in turn is but one component in the 3-prong rule of reason, grounded in the totality of the circumstances.” The Act also makes clear 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.”
- Requires 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 consideration can consist of the period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.”
- Bans 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.
- Renders 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.” (The Act makes clear that “[a]n employer is in compliance with this Section even if the employee voluntarily elects to sign the covenant before the expiration of the 14-day period.)
- Requires “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” for any employee who is terminated, furloughed, or laid off “as the result of business circumstances or governmental orders related to the COVID-19 pandemic” and required to sign a noncompete, nonsolicit, or no-recruit covenant.
- Bans noncompetes for individuals covered by certain collective bargaining agreements or “individuals employed in construction” unless they “primarily perform management, engineering or architectural, design, or sales functions for the employer or . . . are shareholders, partners, or owners in any capacity of the employer.”
- Permits 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.”
- In addition to permitting additional “appropriate relief,” requires payment of costs and reasonable attorney’s fees to an employee who prevails on a claim to enforce a noncompete or nonsolicit.
- Permits the Illinois Attorney General to enforce the statute whenever it “has reasonable cause to believe that any person or entity is engaged in a pattern and practice prohibited by this Act . . . .”
Next up: Nevada
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 and monitoring all of the bills and thank you to my former partner, Peter Steinmeyer, for providing me the up-to-the-minute update on the law’s passage.
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[1] The 25 states are: Arkansas, Connecticut, Georgia, Illinois, Iowa, Kentucky, Louisiana, Massachusetts, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas, Utah, Vermont, Virginia, and West Virginia.
[2] The six states are: Georgia, Kentucky, Mississippi, Nevada, Virginia, and Utah. Note that the Georgia bill discussed here has since died.