Illinois Freedom to Work Act – New Restrictions on Non-Compete Agreements
The recently enacted Illinois Freedom to Work Act (“IFWA”) (820 ILCS 90/1-90/10) imposes new restrictions on non-compete agreements. These changes have left employers scrambling to reconsider the ways in which they can protect their legitimate business interests. Both employees and employers should be aware of how the IFWA effects agreements already in place and what the IFWA requires going forward.
New Limits on pay
For agreements entered into before January 1, 2022, Illinois law prohibits non-compete agreements between an employer and a low-wage employee. A low-wage employee is defined as an employee whose earnings do not exceed the greater of the hourly rate equal to the minimum wage that applicable federal, state, or local law requires or $13 per hour.
For non-compete agreements entered on or after January 1, 2022, the Illinois Freedom to Work Act (“IFWA”) (820 ILCS 90/1-90/10) prohibits non-compete agreements with employees earning $75,000 or less. This new earning threshold is significantly higher than the previous statutory minimum. Employers’ intent on pursuing a claim against an employee for breach of a non-compete must validate that the agreement meets the statutory threshold. Employers who violate the IFWA are subject to prosecution by the Attorney General. Penalties for employers who violate the statute can be severe. For repeated violations by an employer, the Attorney General may request and the court may impose a civil penalty not to exceed $5,000 for each violation or $10,000 for each repeat violation within a 5-year period.
The IFWA also establishes limits on employer’s ability to enforce a non-compete if the employer terminates the employee. This limitation only applies to non-compete agreements entered into on or after January 1, 2022. In a direct response to the pandemic, the IFWA prohibits non-compete agreements with employees who an employer terminated, furloughed, or laid-off as the result of business circumstances or governmental orders related to the COVID-19 pandemic or under circumstances that are similar to the COVID-19 pandemic.
What constitutes circumstances that are similar to the COVID-19 pandemic has yet to be litigated. Circumstances which cause business interruption and which are caused by factors outside of the control of the business are likely to be argued as “similar circumstances” to the COVID-19 pandemic. When employers terminate, lay-off or furlough employees subject to a non-compete agreement due to wide spread interruption in the market place, they should evaluate whether pursuing enforcement of non-compete agreements is worth the cost of litigation. Afterall, courts will not enforce a non-compete agreement if it is unreasonable and is more than necessary to protect an employer’s legitimate business interests.
What is difficult to anticipate is how a COVID-19 like circumstance will change how the courts evaluate whether the non-compete agreement is necessary to protect legitimate business interests. This is especially difficult given that to determine validity the court must weigh the business interest against the hardship on an employee and the injury to the public in limiting people’s ability to find work during a COVID-19 like circumstance. It may be an uphill battle to enforce a non-compete agreement during the next COVID-19 event.
Notice period requirements and consideration
Another statutory change which applies to non-compete agreements entered on or after January 1, 2022 addresses the notice an employee must receive regarding a non-compete agreement. The law mandates that employees receive the agreement 14 days before commencement of employment or the employer must provide 14 days to review the agreement. The employer is required to advise the employee in writing to consult an attorney before entering into a non-compete agreement.
Employers wishing to execute non-compete agreements with existing employees must not only give 14 days for employees to review the agreement with an attorney, they also must provide sufficient consideration for the agreement. What constitutes sufficient consideration depends on the circumstance of the position. Courts have found that absent other consideration, two years of employment is required for a non-compete agreement to be deemed supported by adequate consideration where the employee signed the non-compete as a condition to an employment offer and then voluntarily resigned. If an employer requires a non-compete agreement for an existing employee, it must offer sufficient consideration in the form of money or some other benefit to be enforceable. Otherwise, the employer will not be able to enforce the agreement if the employee leaves the company within two years.
Remedies and Damages
Employers have a variety of remedies for a violation of a non-compete agreement. The court will award monetary damages, injunctive relief, liquidated damages, and possibly attorney’s fees and costs. Employees, who previously were unable to receive attorney’s fees if they prevailed in an action for enforcement, can now recover attorney’s fees if they prevail in an enforcement action under the most recent changes to the statute. There is no statutory basis for employers to collect attorney’s fees if they prevail on a claim for breach of agreement. Employers must then rely solely on the agreement’s attorney’s fees provision to recover the cost of bringing the action.
When hiring an employee, an employer should consider what damages are likely to occur should the employee breach the agreement. The contract should then contain an appropriate damages provision which is a reflection of the anticipated damages should the employee breach the agreement. Liquidated damages are available to employers if the contract provision contains a valid liquidated damages provision. The court will not award both liquidated damages and injunctive relief if the contract states that liquidated damages are the only remedy for breach of the contract. Liquidated damages provisions can be a powerful remedy in certain circumstances and must be weighed carefully against other possible damages.
Of course, actual damages caused by the breach are recoverable. For most businesses, actual damages are lost profits caused by the wrongful competition. However, the court will award monetary damages only if the employer can show a reasonable basis for the damage calculation. The court’s requirement for a reasonable basis for damage calculation requires that an employer prove lost profits with a reasonable degree of certainty. Damages can not be based on speculation or conjecture. If faced with uncertain or difficult to quantify financial harm, liquidated damages provisions should be carefully weighed as a possible contractual alternative.
Perhaps the most powerful of all remedies, a preliminary injunction is a court order requiring that the employee stop all work in violation of the agreement. In order to receive a preliminary injunction an employer has to show a clearly defined right they seek to protect, that an irreparable injury will occur without an injunction, that there is no adequate remedy at law (ie. money damages will not repair the harm), and that the employer is likely to succeed in the case against the employer. A preliminary injunction hearing is conducted like a trial. It requires witnesses testify and be cross examined by the opposing party and evidence must be produced according to the rules of evidence. The judge will then weigh the evidence and determine whether the plaintiff has proven the elements required for a preliminary injunction.
If you are being asked to sign a non-compete agreement or are looking to enforce one, the Law Office of Andrew Szocka, P.C. can help you. Call us today to schedule a free consultation to discuss your employment matter.