What change in state law on non-competes means for Illinois businesses

For years, enforcing noncompete agreements in Illinois was akin to the Wild West.

Recently, however, the Illinois legislature enacted a new law affecting the enforceability of non-competes. In its most basic form, a non-compete is an agreement between an employer and an employee that prohibits an employee from working for a competitor for a period of time after the employee no longer works for that employer.

Non-competes were intended to protect employers from employees leaving and working for a competitor. The goal was to prevent former employees from using confidential and proprietary information gained and relationships built with customers at the prior employer for the benefit of a competitor. It also discouraged employers from poaching employees from competitors.

Non-competes eventually became more complex and might prohibit an employee from owning, consulting with, or having any involvement whatsoever with a competitor. Courts became concerned that non-competes were becoming so burdensome they no longer achieved the initial purpose - to protect an employer's legitimate business interests.

Rather, now they put an unreasonable restraint on an individual's ability to work. Consequently, our courts identified elements necessary to limit how far an employee's activities could be restrained after leaving an employer and requiring that employees receive something in exchange for entering into the noncompete.

One element is requiring the employee be given consideration for signing the noncompete. Consideration can be anything from the offer of employment itself, actual money paid to the employee or additional benefits. A noncompete must have a reasonable geographic area in which an employee is prohibited from competing.

The length of time the employee is prohibited from competing against the employer and the type of activities that are considered to be "competing" with the employer must be reasonable. Furthermore, an employer must also show that it has a legitimate business interest that is in need of protection in order to justify enforcing the noncompete against the employee.

The Illinois Supreme Court created a "totality of the circumstances" test to determine whether an employer has a legitimate business interest and laid out several factors to look at when making this determination. However, there was never a bright-line rule for each of these elements and thus each noncompete agreement was reviewed individually.

This case-by-case analysis continued for several years. In 2022, the state legislature enacted amendments to the Illinois Freedom to Work Act that were supposed to bring more clarity to these issues with non-competes.

One of the most important changes this new law made was the institution of a minimum compensation threshold that is required in order for a noncompete to be valid. Initially, that compensation threshold is $75,000, and this threshold will increase over time. Thus, any noncompete entered into with an employee that makes less than $75,000 in compensation per year is invalid and unenforceable.

The new law also instituted a requirement that employers give employees notice of and an opportunity to review any noncompete with a lawyer of the employees choosing. It also gave the Attorney General the power to prosecute employers found to be habitual violators of the new law.

What the new law did not do, however, is provide much more clarity to the elements of an enforceable noncompete and the factors to be reviewed. The new law has essentially codified the prior case law on these issues, but has not provided the clarity that practitioners had hoped for.

Most recently, the FTC has proposed a new rule that would ban non-competes entirely, although this has yet to be instituted. Thus, it appears that non-competes will continue to be a hotly litigated issue for the foreseeable future.

• Lindsay Sanchez is an attorney in St. Charles. She focuses her practice on corporate law, employment law, commercial and real estate transactions and civil litigation.