Restrictive Covenants Get Restricted: Illinois' New Freedom to Work Act
You may remember that the restaurant franchisor Jimmy Johns made news a few years ago by trying to enforce restrictive covenant agreements to keep even low wage sandwich makers from going to competitors. Starting January 1, 2022, the Illinois Freedom to Work Act (IFWA) will effectively prohibit employers from imposing restrictions on low wage workers when they jump ship to a competitor.
Non-Compete Agreements are very common for higher wage workers or other professionals who gain extraordinary access to confidential company sales and marketing plans and other type of trade secret protectable intellectual property. However, under Illinois law these “non-competes” generally require that companies compensate those employees beyond just offering them a job in order to consider such non-competes enforceable. As we wrote back in May 2019, the Illinois Supreme Court in Fifield v Premier Deal Services, Inc., 2013 IL App (1st) 120327 held that if no additional compensation was being offered, then the employee must work for the employer continuously for two years in order to make a Non-Compete Agreement enforceable. Companion Illinois case law required that enforceability of these agreements serve a legitimate business interest viewed from the totality of the circumstances of each individual case.
Originally passed in 2016, the Illinois Right to Work Act simply prohibited employers from entering into Non-compete Agreements with employees earning less than minimum wage or $13.00 per hour, whichever was greater.
New Codified Rules
On August 13, 2021, Illinois Governor J.B. Pritzker signed into law major changes to the 2016 Illinois Right to Work Act by enacting IFWA. The act codifies Illinois case law and further defines legitimate business interests and the circumstances where such agreements are unenforceable. The new provisions take effect January 1, 2022.
IFWA defines non-competes as agreements that 1) restrict the employee from soliciting fellow employees to leave the company; 2) restrict the employee from soliciting the employer’s clients, prospective clients, or current and prospective suppliers or other employer/third-party business relationships. This type of agreement is objectively void if the employee earns less than $75,000 per year. This dollar threshold gradually increases beginning in 2027.
Non-Solicitations are defined by IFWA as agreements imposing adverse financial consequences upon the employee for accepting employment at a competitor in a similar job for a specific period of time or within a specific geographic area. This type of agreement is objectively void if the employee earns less than $45,000 per year. This dollar threshold also gradually increases beginning in 2027.
Further, an employer can only enforce non-compete and non-solicitation agreements in Illinois if the employer advises the employee to consult with an attorney before signing, and provides a copy of the agreement at least 14 days before the employee’s first day at work or at least 14 days for a current employee to review the agreement. The employee can waive the 14-day notice requirement by signing the agreement before the 14-day notice period ends.
These agreements must also meet a reasonableness requirement which codifies prior Illinois case law, including the Fifield case:
· Adequate consideration for signing one of these agreements is two years of continuous employment after the agreement begins or additional professional or financial benefits that standing on their own are adequate compensation.
· The agreement must be ancillary to a valid employment relationship and the specific restrictions are not greater than required to protect the employer’s legitimate business interest. For example, a Jimmy John’s franchisee will likely not be able to keep a former sandwich maker or even a manager from leaving for a Subway, particularly in a different neighborhood where the franchisee does not compete.
· The agreement does not place an unwarranted hardship on the employee.
· And the agreement is otherwise not detrimental to the public.
· Both agreements become void if the employee is terminated or laid off to due Covid-19 related issues adversely effecting the business.
The IFWA also has enforcement teeth in the form of attorneys’ fees paid to the employee by the employer if the employee successfully defends litigation attempts by the employer to enforce either agreement. And if the State sees a pattern of misconduct by the employer, the Illinois Attorney General is granted broad pre-litigation discovery powers and may pursue monetary damages to the State, restitution and equitable relief. This includes a $5,000 civil penalty for each violation; rising to $10,000 for repeated violations within a five-year period.
Re-think Your Business Model Protection Scheme
As we suggested in our prior analysis of the Fifield case, just giving someone a job is usually inadequate legal protection of your business model. Generally, but not always, the higher paid an employee, the more exposure the employee has to confidential marketing and growth plans, profit margins and other trade secret worthy intellectual property in need of protection. And the more investment that is justified by the employer to protect their business model.
So ask yourself: would you work for you under the circumstances? If the answer is no—you have also found the right answer for your employees.