Dissecting the New Restrictions on Employment Agreements

A new Illinois law limits non-compete and non-solicitation covenants and could have major implications for CPA firms. Here’s what to know.

During the spring legislative session, the Illinois General Assembly unanimously passed legislation amending the Illinois Freedom to Work Act, which has been signed into law by Gov. J.B. Pritzker. The changes may significantly impact your firm’s employment agreements and restrictive covenants of non-compete and non-solicitation, so let’s review the new restrictions.

Public Act 102-0358 expands the Freedom to Work Act by codifying case law and noting when courts will or will not enforce restrictive covenants in employment agreements. The legislation also expands the applicability of the act from employees earning less than $13 an hour to employees earning or expected to earn $75,000 or less per year. Similarly, non-solicitation agreements may not be entered into by employees earning or expected to earn $45,000 or less per year.

Aside from expanding the earnings threshold, the act broadens the calculation of employees’ earnings by now including bonuses, commissions, tips, and other benefits, such as 401(k) plans and flexible spending accounts. Employee earnings thresholds are also escalated, increasing every five years through June 1, 2037, at which time the threshold will be a maximum of $90,000 for non-competes and $52,500 for non-solicitation covenants.

As with any employment agreement, enforcement by the courts is central to resolving contract disputes. The newly added provisions specify that non-compete and non-solicitation covenants will only be enforced if the employment agreement fits within the following parameters: The employee receives adequate consideration (which means either the employee works for the employer for at least two years after signing the covenant, or receives adequate financial and professional benefits); the agreement itself is ancillary to the employment relationship; the agreement is not more restrictive than is required by the employer’s legitimate business interests; the agreement does not impose undue hardship on the employee; and finally, the agreement is not damaging to the public interest. There are specified areas where the expanded restrictions do not apply, such as the sale of a business, confidentiality agreements relating to trade secrets, or to certain construction positions such as management, engineering, architectural design, or sales functions.

The expanded act includes provisions for enforcement and resolution of controversy. While legal precedent allows judicial reformation of overly broad restrictive covenants, the amended act now includes a list of non-dispositive discretionary factors in reforming non-competes and non-solicitation provisions and allows employees to recover reasonable attorney’s fees if they prevail in claims filed against them by their employer. Employers in this instance are treated differently in that the statute does not adopt a prevailing party standard, but rather can only recover attorney’s fees if there is a contractual provision that allows for employer recovery. The attorney general is authorized to pursue investigations and civil enforcement actions where there is “a pattern and practice” prohibited by the act.

These new restrictions go into effect on Jan. 1, 2022, and only apply to agreements entered into after that date. These changes are part of a nationwide progressive movement to remedy abuses and prevent the stifling of competition. There has been similar movement on the federal legislative and regulatory levels. In early 2021, the Workforce Mobility Act would have restricted non-competes at the federal level. While the federal legislation failed to advance, President Biden signed Executive Order 14036 on July 9, 2021, encouraging the chairman of the Federal Trade Commission to exercise the commission’s statutory rulemaking authority to curtail the unfair use of non-compete clauses and other clauses or agreements that may unduly limit worker mobility. While the president’s executive order does not prohibit non-competes, it does highlight a heightened level of review by regulatory authorities and casts a national spotlight on their use.

Here in the Illinois CPA Society’s government relations office, we opposed an across-the-board prohibition of restrictive covenants some states have adopted. I anticipate that this issue will continue to be at the forefront of consideration, and we could see further restrictions in the future. In the meantime, I recommend that you consult with your employment lawyer on anticipated expiring agreements that include these restrictive covenants and review your existing employment offer letters and related documents for compliance purposes.