Understanding The Noncompete Agreement
Noncompete agreements, also known as noncompetition or covenant not to compete agreements, are contracts that restrict an employee or other party from engaging in business activities that directly compete with the business they are associated with. The main purpose of noncompete agreements is to protect a business’s trade secrets, proprietary information, customer relationships, and investments in employee training.
Noncompete agreements are often used when employees or contractors have access to sensitive business information or have built significant relationships with clients. They’re particularly common in high-tech industries, sales, and other sectors where proprietary knowledge and client relationships are central to business success. These agreements might also be used in connection with the sale of a business, to prevent the seller from immediately starting a similar, competing business.
The duration of noncompete agreements varies but is typically reasonably limited to protect the legitimate business interests without unduly restricting an individual’s ability to make a living. In many jurisdictions, the time period must be “reasonable”, often interpreted as one to two years, though specifics can vary.
However, noncompete agreements can give rise to several common issues. One significant area of contention is the scope of the restrictions. An agreement might be challenged if it’s deemed overly broad in terms of its geographic reach or the range of activities it prohibits. Another common issue is enforceability, as some jurisdictions limit the enforceability of noncompete agreements or require certain conditions to be met, viewing them as restraints of trade. In some cases, disputes can arise when an employee leaves a company and the employer seeks to enforce the noncompete agreement, while the employee argues it’s invalid or inapplicable.
Illinois Freedom to Work Act and Illinois Senate Bill 672 (the Amendment)
Illinois Senate Bill 672, which was passed in 2021, amends the Illinois Freedom to Work Act by making it more difficult for employers to enforce non-compete agreements. Under the Amendment, a non-compete agreement executed after January 1, 2022 is only enforceable if:
The employee earns more than $75,000 per year
The agreement is for a reasonable period of time
The agreement is geographically limited
The Amendment likewise prohibits customer and co-worker non-solicit agreements for employees earning $45,000 per year or less. The salary threshold will increase to account for inflation through 2037. For non-competes the thresholds will increase as follows: $80,000 by January 1, 2027; $85,000 by January 1, 2032; and $90,000 by January 1, 2037.
The Amendment also makes it illegal for employers to enforce non-compete agreements against employees who are terminated or laid off due to the COVID-19 pandemic. The Amendment also prohibits customer and co-worker nonsolicitation agreement for employees earning $45,000 per year or less ($47,500 in 2027; $50,000 in 2032; and $52,500 in 2037).
The Illinois Freedom to Work Act and the Amendment are designed to give employees more freedom of choice when it comes to their employment. The Amendment, in particular, is intended to make it more difficult for employers to use non-compete agreements to prevent employees from moving to new jobs.
Here are some of the potential benefits of the Illinois Freedom to Work Act and the Amendment:
Increased employee mobility: The Amendment could make it easier for employees to move to new jobs, which could lead to increased wages and productivity.
Reduced employee turnover: Employees may be less likely to leave their jobs if they are not bound by non-compete agreements.
Increased competition: The Amendment could lead to increased competition among businesses, which could benefit consumers.
However, there are also some potential drawbacks to the Illinois Freedom to Work Act and the Amendment:
Reduced employer flexibility: Employers may have less flexibility in how they structure their businesses if they are unable to use non-compete agreements to protect their trade secrets and confidential information.
Increased litigation: The Amendment could lead to increased litigation as employees and employers dispute the enforceability of non-compete agreements.
Reduced wages: If employees are more likely to move to new jobs, employers may be less willing to invest in training and development, which could lead to lower wages.
Employees Must Be Advised to Consult Counsel and Be Given 14 Days to Sign
Under the Illinois Freedom to Work Act, employees must be advised to consult counsel and be given 14 days to sign a noncompete agreement. The Act defines “counsel” as an attorney who is not employed by the employer and who is not a party to the noncompete agreement. The 14-day period begins on the date the employee receives the noncompete agreement.
The purpose of these requirements is to ensure that employees have adequate time to consider the terms of the noncompete agreement and to consult with an attorney before signing it. The Act also prohibits employers from retaliating against employees who refuse to sign a noncompete agreement.
Adequate Consideration Must Support The Noncompete Agreement
adequate consideration is required to support a noncompete agreement under the Illinois Freedom to Work Act (IFWA). Adequate consideration is something of value that is given in exchange for the promise not to compete. In the context of a noncompete agreement, adequate consideration could be anything from a salary increase to a signing bonus.
The IFWA requires that all noncompete agreements entered into on or after January 1, 2022, be supported by adequate consideration. This is a significant change from the previous law, which did not require adequate consideration for noncompete agreements.
The purpose of requiring adequate consideration is to ensure that employees are not forced to sign noncompete agreements under duress. If an employee is not given anything of value in exchange for their promise not to compete, then the noncompete agreement may be unenforceable.
If you are an employee who has been asked to sign a noncompete agreement, it is important to make sure that the agreement is supported by adequate consideration. If you are not sure whether the agreement is enforceable, you should speak with an attorney.
Here are some examples of what might constitute adequate consideration for a noncompete agreement:
It is important to note that not all of these things will necessarily be considered adequate consideration. The specific facts of each case will determine whether the consideration is adequate.
Employers Must Have Legitimate Business Interests in Need of Protection
under the Illinois Freedom to Work Act and Amendment, employers must have a legitimate business interest in need of protection to subject its employees to a noncompete agreement. The Act defines a “legitimate business interest” as “one that is reasonably necessary to protect the employer’s trade secrets, confidential information, or customer relationships.”
The Act also provides a list of factors that courts may consider in determining whether an employer has a legitimate business interest, including:
The nature of the employer’s business
The employee’s position and responsibilities
The employee’s access to trade secrets, confidential information, or customer relationships
The likelihood that the employee will use the employer’s trade secrets, confidential information, or customer relationships to compete with the employer
The harm that the employer would suffer if the employee were to compete with the employer
If an employer does not have a legitimate business interest in need of protection, then a noncompete agreement entered into by the employee may be unenforceable.
Here are some examples of legitimate business interests that may justify a noncompete agreement:
Protecting trade secrets
Protecting confidential information
Protecting customer relationships
Preventing employees from taking clients or customers with them when they leave the company
It is important to note that not all of these things will necessarily be considered legitimate business interests. The specific facts of each case will determine whether the employer has a legitimate business interest.
Certain Agreements Exempt Under the IFWA
The Amendment to the Freedom to Work Act makes clear that it does not apply to the following types of agreement:
Agreements between employers and employees who are subject to a noncompete agreement that was entered into before January 1, 2022.
Agreements prohibiting the use or disclosure of trade secrets.
Invention assignment agreements.
Garden leave clauses (agreements whereby an employee leaving a job—having resigned or otherwise had their employment terminated—is instructed to stay away from work during the notice period, while still remaining on the payroll).
Restrictive covenants entered into as part of a business acquisition or sale, including acquiring or disposing of an ownership interest in a business.
Agreements where an employee agrees not to reapply for employment to the same employer after termination.
Enforcement Of Noncompete Agreements In Other Jurisdictions
The enforceability of noncompete agreements varies widely depending on the jurisdiction, the circumstances of the agreement, and the specific business situation. In general, courts will evaluate several factors to determine whether a noncompete agreement is reasonable and thus enforceable.
Firstly, the agreement must protect a legitimate business interest, such as trade secrets, confidential business information, customer relationships, or investments in special training. A noncompete agreement designed simply to stifle competition or prevent an employee from earning a living is unlikely to be enforceable.
Secondly, the scope of the agreement — in terms of the duration, geographic area, and activities restricted — must be reasonable. An agreement that lasts for an excessively long time, covers an overly broad geographical area, or unduly restricts a person’s ability to work in their profession will likely be seen as unreasonable.
Additionally, in many jurisdictions, the agreement must not impose undue hardship on the employee and must not be injurious to the public. This means that it should not prevent the employee from earning a living in their chosen field or result in a shortage of necessary services in a certain area.
It’s important to note that the legal landscape for noncompete agreements varies significantly from one jurisdiction to another. Some states, like California, are notorious for their strong public policy against noncompete agreements, making them almost entirely unenforceable. Other states are more lenient, allowing noncompete agreements as long as they are reasonable and protect a legitimate business interest.
In some cases, if a court finds a noncompete agreement to be overly broad or unreasonable, it may choose to “blue pencil” or modify the agreement to make it reasonable and enforceable, rather than invalidating it entirely. However, not all jurisdictions permit this type of judicial modification.
Contact Our Chicago Business Attorneys
Understanding and effectively implementing noncompete agreements can be a crucial aspect of protecting your business’s interests. Our business attorneys are experienced in navigating the intricacies of noncompete agreements. Whether you need assistance drafting a noncompete agreement, want help reviewing an existing one, or are facing potential enforcement issues, our attorneys are here to support you. We invite you to contact our firm to explore how we can help protect your business interests and provide you with peace of mind in your noncompete matters.