Category: Resources

Thinking of becoming a Federal Contractor?

Thinking of becoming a Federal Contractor?

Consider these employment law requirements first.

Any business looking to become a federal contractor or subcontractor must take note of the employment law requirements associated with these contracts. There are three federal laws and their related regulations which prohibit federal contractors and subcontractors from employment discrimination. Anti-discrimination obligations are not unusual as most employers are subject to these same requirements under various other federal and state laws. What makes these three federal laws unique, is that they also require the contractor or subcontractor to engage in positive, results oriented actions to employ and advance the employment of qualified individuals in certain groups. This Affirmative Action Plan (AAP) is not required for employers under federal laws such as Title VII or Section 1981 and is unique to federal contractors and subcontractors. (States may have AAP requirements for state contractors and subcontractors).

These three laws are:

A contractor or subcontractors’ obligation under each of these laws depends on the dollar value of the contract and the type of federal contract.   To understand the full breadth of your obligation, consulting an experienced law firm is critical to avoid unnecessary costs in the future.

Planning for Affirmative Action Requirements

The burdens of complying with the laws affirmative action obligations can be costly. When budgeting for the costs for complying, contractors should consider the following costs when submitting their bids for federal government contracts including:

  • Designating or hiring personnel to:
  • maintain personnel data for annual reports to the federal government and to meet regulatory requirements;
  • ensure proper posting of notices;
  • draft appropriate job listings and job advertising;
  • engage in outreach and recruiting as required and document those efforts;
  • file appropriate reports; and
  • prepare files and records for periodic government compliance evaluations (audits).
  • Drafting or retaining a third-party consultant to draft written affirmative action program documents and analyze personnel data.

Federal contractors typically do not appreciate the significant consequences of the additional affirmative action contractual obligations. For example, employers often do not appreciate that they typically must have a high volume of federal contracts to reduce the marginal costs of affirmative action obligations and increase profits.

Importantly, the federal government conducts periodic audits of federal contractors and subcontractors to ensure compliance with their obligations. The Office of Federal Contract Compliance Programs (“OFCCP”), a federal agency within the Department of Labor (DOL), enforces the federal affirmative action laws and regulations. The consequences of non-compliance can be severe, even when no allegation of discrimination is alleged.  For example, if the federal government believes the contracted is not meeting its affirmative action obligations, sanctions may include:

  • Negotiating a settlement of discrimination and other alleged violations with OFCCP.
  • Litigation with OFCCP through an enforcement action.
  • Withholding progress payments on work completed by the contractor, if:
  • the employer violates a conciliation agreement and OFCCP debars the employer, or
  • there is an agency specific audit, for example, Department of Defense (DOD) withholds progress payments.
  • Preventing the contractor from bidding on other federal work.
  • Baring the contractor from obtaining future federal contracts.
  • As a result, the contractor could:
  • Be responsible for “make whole relief” for alleged victims of discrimination.
  • Lose opportunities to earn other income from the federal contracts and reduce the relative costs of affirmative action obligations.

Understanding what steps your business must take to meet its obligations under the various federal laws which apply to contractors and subcontractors first requires that you have documented and understand your current employment practices. Conducting an Employment Practice Audit with our firm is the first step to evaluating whether additional changes to your employment procedures and documents will be necessary before pursuing a federal contractor status. Once you have identified your current procedures, any additional steps, including the developed of a written Affirmative Action Plan (AAP) can be scoped and the additional costs associated with this work accurately reflected in the bid.

Employment Practice Audit

Employment Practice Audit

Employment law compliance is rarely the paramount focus of most business owners. Small business owners and start-up founders are not an exception. Regrettably, there are no general exceptions to the law for small businesses and start-ups. The risks to a small or new business can be substantial as investors or buyers are keen to understand unforeseen financial risks which impact the valuation. Entrepreneurs and established businesses alike should consider whether their employment practices are putting their growth at risk by placing unnecessary financial risks on the books.

What is an Employment Practice Audit?

Like a doctor’s check-up, an Employment Practice Audit examines the company’s handbook, policies, practices, job descriptions, forms, files and work environment to evaluate whether the company is in compliance with legal requirements and whether the business is optimizing its operations and human capital.

A complete audit will review every stage of the employee cycle; including the recruiting and hiring practices, management and discipline procedures, handbooks, agreements, exit and termination requirements, and employee records maintenance. The auditor will assess some of the issues that human resource managers deal with daily, for example, (a) how does the business respond to harassment and discrimination complaints; (b) are employees classified properly under FLSA; (c) whether the business has the appropriate forms and procedures for training, evaluating, disciplining, and rewarding employees.

While an Employment Practice Audit can take various shapes and forms, the goal remains the same, to address the company’s most pressing needs and minimize legal risk. An audit can be tailored to the risks and challenges that the business is likely to face. There is no one one-size fits all audit approach.

Why conduct and Employment Practice Audit?

Simply, your management team does not have the time to undertake a time-consuming project. As employment laws continue to change, even sophisticated employers are hard-pressed to keep up to date with the changes. Without a regular check-up, companies will find that their employment agreements, pay practices, or hiring requirements may no longer meet a new legal standard.

The audit provides an opportunity to minimize the risk of fines, penalties, or lost revenue which may come from an illegal or non-effective employment practice. A well conducted audit can also proactively reduce the risks and costs of litigation by placing the employer in the best possible position to defend against allegations of wrongdoing. For companies that have experienced extreme growth, an audit is the best way to make sense of the day-to-day employment practices in their organization.

A regular audit can also minimize risk to the leaders of the company. It is not possible for a C-Suite leader to evaluate the minutia themselves but that does not absolve the leader of the duty to ensure compliance. The audit ensures that the company has taken the necessary steps to make its employment practices align with the law.

Which areas need immediate focus?

Although legislative activity at the federal level has slowed and appears in some cases to be trending in favor of employers, the laws in Illinois have changed dramatically. Smaller employers with fewer than fourteen employees need to come into compliance with the Illinois Human Rights Act (IHRA), 775 ILCS 5/1-101, et seq. Illinois employers also need to assess job applications, employment agreements, arbitration agreements, confidentiality agreements, and severance agreements for compliance with the Workplace Transparency Act, 820 ILCS 96/1-1, et seq.

Even if a full audit is not possible, due to time or cost considerations, all employers should consider at least conducting an audit of the following four areas:

  1. the proper classification of workers and wage and hour compliance;
  2. compliance with changing minimum wage, paid leave, hiring, and other requirements that have been implemented at the state or local level; and
  3. reporting and training on harassment and discrimination.
  4. legal compliance and risks associated with legalized cannabis.

Andrew Szocka, P.C. offers its clients a tailored approach. We recognize that not every business has the band-width to implement a broad audit. We offer cost effective solutions for businesses which need to ensure their key practices, policies and documents are in compliance. For those businesses which have experienced mergers, acquisitions or organic growth, a more robust audit is likely to yield a greater return on the investment. Our firm can devise a strategic plan to assess the key areas of concern, implement immediate corrective actions, and develop long term strategies for future compliance implementation.

 

 

Illinois Non-solicitation Agreements

Illinois Non-solicitation Agreements

Non-solicitation agreements are provisions in employment agreements which, in the event that the employee leaves the company, prohibit the employee for contacting valuable customers or employees. Non-solicitation agreements most commonly extend to employees, clients, and patients of the company. The goal is to make sure that in the event that the employee goes to work for a competitor, a company can stop the employee from soliciting its clients, customers, or employees.

Non-solicitation agreements are valuable if, because of the nature of the business, employees are able to leave their employer and start their own business with relatively little capital a company has the ability to limit the damage from that competition. If an employee can take a few key clients or employees and start a competing business, a business has a strong interest in protecting themselves from such harm. Non-solicitation agreements assist an employer to ensure that they are protecting the time, money, and goodwill they have created from being taken by a competing firm which has not invested the same amount of time and money to build their business. A non-solicitation agreement is a tool to prevent unfair methods of competition.

State law, not federal law, governs non-solicitation agreements. In Illinois, non-solicitation agreements are governed by the Illinois Freedom to Work Act (“IFWA”). Under the IFWA,  a “Covenant not to solicit” is defined as an agreement between an employer and an employee that (1) restricts the employee from soliciting for employment the employer’s employees or (2) restricts the employee from soliciting, for the purpose of selling products or services of any kind to, or from interfering with the employer’s relationships with, the employer’s clients, prospective clients, vendors, prospective vendors, suppliers, prospective suppliers, or other business relationships. (820 ILCS 90/5).

The IFWA places restrictions on who can be subject to a non-solicitation agreement. The Act prohibits an employer from “entering into a covenant not to solicit with any employee unless the employee’s actual or expected annualized rate of earnings exceeds $45,000 per year. This amount shall increase to $47,500 per year beginning on January 1, 2027, $50,000 per year beginning on January 1, 2032, and $52,500 per year beginning on January 1, 2037. A covenant not to solicit entered into in violation of this subsection is void and unenforceable.” (820 ILCS 90/10).

A covenant not to solicit is illegal and void unless (1) the employee receives adequate consideration, (2) the covenant is ancillary to a valid employment relationship, (3) the covenant is no greater than is required for the protection of a legitimate business interest of the employer, (4) the covenant does not impose undue hardship on the employee, and (5) the covenant is not injurious to the public.  (820 ILCS 90/15).

Unlike non-compete agreements, non-solicitation agreements are more likely to be enforced because they are not restraints on trade but merely restraints on who someone can contact.  So long as the restraint on who the employee can contact is reasonable, the courts will enforce the non-solicitation agreement. A reasonable agreement is one which is not broader than necessary to protect an employer’s legitimate business interest. The court will balance the employer’s legitimate business interest with the employees need to find work. If the restriction places an undue burden on the employee, it is likely not reasonable.

For assistance with a question relating to a non-solicitation agreement or other Illinois employment law issues, please contact the Law of Office Andrew Szocka, P.C. to speak with an attorney today.

 

Illinois Freedom to Work Act – New Restrictions on Non-Compete Agreements

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.

Termination Restrictions

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.

Strategies for Calculating Adequate Consideration under the Illinois Freedom to Work Act

Strategies for Calculating Adequate Consideration under the Illinois Freedom to Work Act

The Illinois Freedom to Work Act (“IFWA”) (820 ILCS 90/1-90/10) makes it clear that invalid non-compete agreements are prohibited and subject to penalties for each violation. Given the statutes limitations, prohibitions and penalties for violation, employers should reconsider when and how they use non-compete agreements. Having a one-size fits all non-compete agreement for all employees will likely incur financial penalties. The IFWA also enshrines in statute a requirement that an employer must provide adequate consideration in exchange for the promise not to compete. Employers must now balance the risk of penalty and the cost of the consideration when executing non-compete agreements with their employees.

The IFWA states that any non-compete agreement entered into on or after January 1,2022 is void unless it was made with adequate consideration. The new law also codifies what adequate consideration means. According to the statute, adequate considerations is either:

  1. The employee worked for the employer for at least 2 years after the employee signed an agreement containing a non-compete agreement.
  2. The employer otherwise provided consideration adequate to support an agreement not to compete. This consideration can consist of a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.

Before the enactment of the IFWA, the courts had established that two years of employment is necessary because any promise of employment as consideration for a non-compete was illusory for employment at will. The result was that Illinois courts found that absent other consideration, two years of employment is required for a non-compete agreement to be deemed adequate. Fifield v. Premier Dealer Services, Inc. 2013 IL App (1st) 120327, ¶19 (2013).

While traditionally, “any act or promise that benefits one party or disadvantages the other is sufficient consideration to support the formation of a contract.”  Bires v. WalTom, LLC, 662 F. Supp. 2d 1019, 1028 (N.D. Ill. 2009), citing Cincinnati Ins. Co. v. American Hardware Mfrs. Ass’n, 387 Ill. App. 3d 85, (1st Dist. 2008). “In the context of postemployment restrictive covenants, Illinois courts depart from the traditional rule that the law does not inquire into the adequacy of consideration, only its existence.” Brown & Brown, Inc. v. Mudron, 379 Ill. App. 3d 724 (Ill. App. Ct. 2008); Bires v. WalTom, LLC, 662 F. Supp. 2d 1019, 1030 (N.D. Ill. 2009).

 

Courts have suggested what might be adequate consideration when coupled with some number of years of employment less than two. “If there is evidence that there was additional consideration, such as added bonus in exchange for this restrictive covenant, more sick days, some incentives, some kind of newfangled compensation that would be considered in the eyes of the law additional consideration that would then support the restrictive covenant as being less than two years.” McInnis v. OAG Motorcycle Ventures, Inc., 2015 IL App (1st) 142644, ¶ 18, (2015)

Consideration is sufficient for a contract which includes a non-compete clause when it is a substantially related to the actual value of the transaction. In Russell v. Jim Russell Supply, Inc., the consideration was held to be both existent and adequate to support the contract which included the covenant not to compete. Jim Russell received $ 550,000 cash, a $ 10,000 truck and the release of all partnership liabilities in exchange for the transfer of Jim’s 50% interest in the partnership assets and the covenant not to compete. Russell v. Jim Russell Supply, Inc., 200 Ill. App. 3d 855, 860-61, (5th Dist. 1990).  In Russell, the consideration for the 50% business interest and the promise not to compete was a substantial cash payout, a valuable truck and release of partnership liabilities.

While no Illinois case has yet established an exact standard for determining the adequacy of cash consideration for a non-compete, what the case law does suggest is that consideration for a non-compete cannot be nominal, must be of actual financial value to the employee and must be a value equal to the benefit of having guaranteed employment for two years.

To answer the question everyone wants to know – how much cash should I pay as consideration for a non-compete agreement with an employee to ensure that the non-compete agreement is enforceable? While no court has yet answered this question with a formulaic answer, the current case law suggests that the value of the consideration is inverse to the value of the length of employment up to the statutory two-year period.

What then is the financial value to the employee of guaranteed two years of employment? That value is the difference between what the employee receives with their current employer and what the employee could receive if they left the job to compete against their employer. That value is the amount of profit that the employee could take away from their current employer if they left.

Therefore, to be immediately enforceable, the amount of consideration should be equal to the amount of damage that the employee’s competition could cause, multiplied by the probability that the employee’s competitive activity would cause that harm to the business. Anything less than this amount would require a proportional amount of time employed by the company before the non-compete would become enforceable.

Keep in mind that cash consideration paid at the time of execution is not the only financial consideration that the courts will use to evaluate whether the consideration was adequate. The court will consider both the cash payment at the time execution along with applicable future increased earnings or benefits the employee receives when determining the adequacy of the consideration.

Employers must carefully weight the value of the future financial benefits to the employee along with any upfront cash payments against the two-year statutory period to ensure that consideration is adequate within a short enough timespan so the non-compete agreement’s enforceability date meets the employer’s business objectives. A business should conduct a cost/benefit analysis to determine if implementing a non-compete is financially worth the cost given that the consideration must be more than a mere promise or nominal cash payments and must be whatever the value is of having a position guaranteed for two years.

A simple analysis which balances the cash costs of the non-compete agreement against the risk of damage will help guide a business when deciding whether a non-compete agreement is worth the financial costs of the consideration.

If  then the risk of loss from the employee’s competition outweighs the financial cost of the non-compete agreement where,

  1. is the dollar amount of the consideration paid in cash to the employee at the time of execution.
  2. is the time value of the cash paid to the employee.
  3. is the cost to enforce the agreement.
  4. is the probability of having to enforce the agreement.
  5. is the amount of damage that the employee’s competition could inflict on the business.

Businesses have long struggled to adequately enforce non-compete agreements in part because of the adequately of the consideration. The IFWA only further escalates that risk.  By strategically implement a non-compete consideration strategy which outlines the calculation methodology, businesses are in a significantly stronger position when it comes to enforcing a non-compete.

For assistance with a question relating to this topic or other Illinois employment law issues, please contact the Law of Office Andrew Szocka, P.C. to speak with an attorney today.