New Illinois Law Bans Non-Competes for Low-Wage Workers
A new Illinois law soon will render invalid non-compete agreements with most lower-level employees. Governor Rauner has signed into law the Illinois Freedom to Work Act (IFWA), 5 ILCS 140/1, et. seq., which prohibits private employers from entering into non-compete agreements with “low-wage employees,” defined as $13.00 per hour or less. The law is designed to prevent abuses of non-competes against employees who pose no real threat to their employer. The IFWA applies to non-compete agreements entered into on or after January 1, 2017, the effective date of the IFWA.
Until a few years ago, Illinois was known to be a non-compete-friendly jurisdiction for employers wanting to enforce non-compete agreements against former employees. While the courts have never rubber-stamped these agreements, Illinois employers stood a good chance of getting non-competes enforced if they were reasonably drafted based predictable, longstanding criteria.
But a trend in the other direction appears to be taking hold in Illinois. The IFWA is the latest in a string of judicial and legislative actions in Illinois that make it more difficult for employers to predictably obtain and enforce non-compete agreements and other restrictions against former employees.
In 2013, to the surprise of many in the industry, an Illinois appellate court imposed for the first time a “two-year rule” which prohibits employers from enforcing non-compete agreements against employees who leave employment for any reason before two years. (Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327). Several courts since then have issued decisions upholding the two-year rule. On its heels, a federal judge in Illinois struck down a seemingly standard confidentiality clause similar to those contained in many employment agreements (provisions not historically challenged or invalidated), based on the court’s view that the restriction was too broad. (Fleetwood Packaging v. Hein, 2014 WL 7146439 (N.D.Ill. 2014). On the flipside, the Illinois Supreme Court has done away with the predictable and well-established “legitimate interest” test long implemented in non-compete cases, in favor of a fact-specific weighing of the interests in the case, arguably expanding the reasons employers may argue for enforceability of restrictive covenants. (Reliable Fire Equipment Comp. v. Arnold Arredondo, 2011 IL 111871).
Now, under the IFWA, employers may no longer bind employees to non-compete agreements if they earn under the $13.00 threshold. Specifically, the law applies to agreements that:
Prevent any work for another employer for a specified period of time;
Prevent any work in a specified geographical area; or
Prevent work for another employer that is similar to such low-wage employee’s work for the current employer.
Any such restrictions entered into after January 1, 2017 will be void and unenforceable.
The IFWA assumes that low wage earners generally do not have access to the type of sensitive, proprietary information, or customer or client relationships, that the law would recognize as a legitimate basis to support a non-compete restriction. Indeed, the new law is the Illinois legislature’s response to an outcry by public officials to “do something” about perceived abuses by some employers in restricting workers who do not pose any realistic threat to the employers’ confidential information or customer base.
Significantly, agreements preventing disclosure of employer confidential information are not covered by the IFWA. It is unclear whether restrictions that fall short of wholesale non-competition are; The law is silent as to non-solicitation restrictions that would stop a former employee from soliciting customers or employees away from the current employer, for example.
The ultimate effect of the new law on Illinois employers will vary. For employers that use non-competes sparingly, reserving them for senior executives with meaningful access to the company’s “crown jewels” or high revenue clients, the law will have little effect. But employers that rely on widespread use of non-competes throughout their ranks may need to either increase salaries for employees earning less than $13 per hour, or re-evaluate if a non-compete is truly necessary for those workers. In light of emerging trends and uncertainty in enforcement of non-compete agreements, many Illinois employers may find themselves shifting focus toward incentives to retain employees rather than worrying about what they do after they leave.