Illinois Limits Non-Compete Agreements Yet Again
On August 19, 2016, Governor Bruce Rauner officially signed into law the Illinois Freedom to Work Act (the “Act”), with an effective date of January 1, 2017. The Act, while short and to the point, will have a significant impact on private sector employers who routinely require all employees, regardless of job level or wage, to enter into non-competition agreements.
The Act expressly prohibits private sector employers from entering into a “covenant not to compete with any low-wage employee of the employer.” Any such agreement “is illegal and void.” The Act’s definition of “covenant not to compete” is fairly broad, and includes any agreement that restricts the employee from performing:
A. any work for another employer for a specified period of time;
B. any work in a specified geographical area; or
C. work for another employer that is similar to such low-wage employee’s work for the employer included as a party to the agreement.
“Low-wage employee” is defined as “an employee who earns the greater of (1) the hourly rate equal to the minimum wage required by the applicable federal, state, or local minimum wage law or (2) $13.00 per hour.
Only agreements entered into after January 1, 2017 fall under the Act’s purview. Significantly, the Act provides no guidance on whether it applies to employee or customer non-solicitation restrictive covenants. It is unclear whether the Act will be interpreted to apply to other such provisions in similar agreements.
So, why now? Some high-profile examples, including one restaurant chain foisting non-competes on sandwich makers, have drawn the attention of certain state attorney generals and then the press. See the Illinois Attorney General’s press release here. In addition, the White House commissioned a study of non-compete agreements and recommended limitations on them. See the study here.
All too often, employers routinely issue non-compete agreements with new hire packets to employees who pose no real threat to the company’s legitimate business or protectable interests if they were to leave the company and join a competitor. Under judicial scrutiny, these agreements would likely not pass muster due to the lack of underlying protectable interests. To this end, what legitimate reason would a company have to require its janitorial staff or greeters to sign non-compete agreements? Protection of proprietary, confidential and trade secret information? Protection of long-term customer relationships? Probably not. Though these examples may appear far-fetched, many employers require lower level employees to sign sweeping non-competition agreements as part of the hiring process. The lack of protectable interests not-withstanding, such agreements may still have a chilling effect on employees looking to change jobs. For example, an employee without the resources to hire an attorney to evaluate or challenge a non-compete or other restrictive covenant may not understand his or her options. Given the high-profile attacks on non-competes for lower level employees, Illinois took action.
This legislative action, of course, follows the significant Illinois court decision in Fifield v. Premier Dealership Servs., 2013 IL App. (1st) 120327, 933 N.E.2d 938 (Ill. App. Ct. 2013), which scrutinized the “consideration” supporting restrictive covenants. In Fifield, the First Appellate District Court ruled that the promise of “at-will” employment alone is insufficient consideration to support a valid non-compete covenant under Illinois law. The court held that where there is no additional, independent consideration, two or more years of continued employment is required to constitute adequate consideration to support such a covenant, and it created a “bright-line” rule which has impacted Illinois cases ever since. Fifield served as a blow to employers who rely on initial employment as consideration for entering into post-employment restrictive covenants and generally undermined the enforceability of such agreements.
The Act is the next step in limiting non-compete agreements in Illinois. For companies who have taken a measured approach to non-competes, the Act should not affect their agreements. However, companies with the practice of blindly or universally issuing restrictive covenant agreements with non-competition provisions to all newly hired employees, including “low wage” workers, should modify their practices before January 1, 2017. Beyond then, any covenant not to compete entered into with a low-wage employee, as defined by the Act, will be considered “illegal and void.”
Even companies not technically affected by the Act should take this opportunity to evaluate their use of restrictive covenants and non-compete agreements and the employees who sign them. Employers should consider commissioning an informal audit to identify why they have non-compete provisions and what legitimate business interests they are trying to protect. A desire to stifle competitive activity is not a legitimate, protectable interest. Only those employees who have access to and knowledge of protectable interests, typically those in a management or higher-level sales type role, should be subject to such restrictions. Employers certainly have the right to protect their confidential and trade secret information, their relationships with their customers and employees, and other protectable interests; they simply need to do so in a reasonable and tailored fashion.
However, other types of post-employment restrictions may be appropriate for all employees, regardless of wage or job position, such as confidentiality and non-disclosure provisions. An employee non-solicit may even be appropriate depending on the situation. Some employers have adopted a “tiered” approach to restrictive covenant agreements, where higher-level employees enter into non-competition and non-solicit agreements and lower-level employees sign agreements with only confidentiality and non-disclosure provisions. A court is more likely to enforce an agreement that is reasonable, defensible, and limited in its reach, than one that purports to restrain the lowest level employees from making a living in any capacity.
Though the Act, Illinois has joined the list of states taking action, legislative or otherwise, limiting the scope of non-competition agreements and other restrictive covenants, such as Massachusetts, Wisconsin, and Nevada (not to mention outright prohibitions in California, Oklahoma and North Dakota). It is also likely that Illinois courts will continue to heavily scrutinize these agreements, and employers should use sweeping non-competition agreements judiciously.