Does Increased Freedom Buy Increased Litigation?

Synopsis and Analysis of the Illinois Freedom to Work Act Amendments

BY DIANA C. SERVOS

On January 1, 2022, significant amendments to the Illinois Freedom to Work Act (“IFWA”) went into effect, changing the drafting and litigation landscape.1 This article will examine the legislative and judicial history of restrictive covenants, discuss the recent amendments, and analyze the prospective impact of the amendments on future drafting and litigation.

I. GETTING TO TODAY’S ILLINOIS FREEDOM TO WORK ACT

Prior to any legislative involvement, restrictive covenants were governed solely by case law. There was no statutory regulation. This structure existed for many years, although an analytic framework evolved through judicial interpretation over time. Recent cases governing the application and interpretation of restrictive covenants include Reliable Fire Equipment Co. v. Arredondo1 and Fifield v. Premier Dealer Services Inc. 2

In June 2016, restrictive covenants came under intense scrutiny in the context of low-wage workers. At that time, Attorney General Lisa Madigan filed suit against Jimmy 1 Reliable Fire Equipment Co. v. Arredondo, 2011 IL 111871. 2 Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327. John’s for its use of a non-compete clause.3 The Jimmy John’s non-compete clause prohibited employees during employment and for two years afterward from working at any other business that sells “submarine, hero-type, deli-style, pita, and/or wrapped or rolled sandwiches” within, depending on the year the agreement was entered into, two or three miles of any Jimmy John’s shop.4 In December 2016, the litigation was settled Diana C. with Jimmy John’s agreeing not to Servos is the enforce that provision.5 managing attorney of S.T. Legal Group located in Deerfield, Illinois. Her practice is focused on employment law, where she advises employees and 3 4 5 People v. Jimmy John’s Franchise LLC, Case No. 2016 CH 07746 (Cir. Ct. Cook County). https://www.reuters.com/article/jimmyjohns-settlement/jimmy-johns-settlesillinois-lawsuit-over-non-compete-agreements-idUSL1N1E21BX. https://www.reuters.com/article/jimmysmall employers on a wide variety johns-settlement/jimmy-johns-settlesof issues, including in litigation. illinois-lawsuit-over-non-compete-agreements-idUSL1N1E21BX.

The thought that such a restrictive covenant might be enforced, however, also irked the legislature. Effective January 1, 2017, Illinois enacted the Illinois Freedom to Work Act (the “Act”). This Act centered on the concept of “low wage workers,”6 defined as those earning the applicable federal, state, or local hourly minimum wage, or $13.00/ hour, whichever is greater. The Act declared that non-compete agreements with low wage workers are illegal and void. The Act only focused on non-competes. No limitations were placed on non-solicitation, non-disclosure, non-disparagement, or confidentiality agreements. Non-competes were considered to be any limitation on work for another employer for a specified time period, any work in a specified geographical area, or work for another employer that is engaged in similar services or products.

II. THE 2022 AMENDMENTS

In 2021, substantial changes were made to the Act (the “2022 Amendments”). The result is a statute that, although using the same title, bears almost no resemblance to its predecessor. The 2022 Amendments apply to all employment agreements entered into after January 1, 2022.7 The following concepts are addressed in the 2022 Amendments:

Expanded Employee Protection

Most significantly, the amendments eliminate the concept of low wage workers, i.e. the minimum wage or $13/hour concept. Instead, the statute applies statutory compensation thresholds for the application of both non-competes and non-solicits.8 Under the 2022 Amendments, allowable non-competes are limited to employees whose “actual or expected annualized rate of earnings exceeds” $75,000/year and allowable non-solicits are limited to employees whose “actual or expected annualized rate of earnings exceeds” $45,000/year.9 Compensation thresholds will increase over time.10

COVID-19 Protection

Perhaps reflective of the times, but with likely little future application, agreements cannot be enforced against 6 820 ILCS 90/1 (2016). 7 820 ILCS 90/10 (2022). 8 Id. 9 Id. 10 Id.

employees laid off or furloughed because of COVID-19 or “under circumstances that are similar to the COVID-19 pandemic” unless the covenant provides for payment of employee’s base salary for a specified period of time.11 Requirements for Enforcement The Act codifies two recent, seminal cases in restrictive covenant jurisprudence: Fifield and Reliance Fire. In June 2016, restrictive Specifically, as addressed by Fifield, the concept of covenants came under “adequate consideration” is codified to mean either (1) intense scrutiny in the an employee has worked for the employer for at least two years after signing a restriccontext of low-wage tive covenant agreement; or (2) employer has provided workers. At that time, the employee with professional and financial benefits

Attorney General Lisa that constitute independent consideration.12 Madigan filed suit against As addressed in Reliable Fire, the principle of “legitimate business interest” Jimmy John’s for its use of is codified to consider an employee’s exposure to the a non-compete clause. employer’s customer relationships or other employees; employee’s acquisition, use, or knowledge of confidential information through the employee’s employment; time restrictions; geographic restrictions; and scope of the activity restrictions.13 The statute adds “[e]ach situation must be determined on its own particular facts.”14 It further adds, “[r]easonableness is gauged not just by some, but by all of its circumstances.”15 To make clear that this will be interesting, it ends with: “[t]he same identical contract and restraint may be reasonable and valid under one set of circumstances and unreasonable and invalid under another set of circumstances.”16 Review Period Similar to the effect of the Workplace Transparency Act on severance agreements, the 2022 Amendments added a review period. An employee shall be given 14 days to review a restrictive covenant, preferably before commencing work.17 In addition, employers must advise employees of their right to consult with an attorney before entering into the agreement.18 11 820 ILCS 90/10(c) (2022). 12 820 ILCS 90/5 (2022). 13 820 ILCS 90/7 (2022). 14 Id. 15 Id. 16 Id. 17 820 ILCS 90/20 (2022). 18 Id.

Attorneys’ Fees in Enforcement Actions

Enforcement actions on restrictive covenants have followed the common law rule that each party is responsible for its own attorneys’ fees unless the parties have contracted otherwise. To address the concern of employer-favorable fee-shifting provisions, by statute, employees can now recover attorneys’ fees and costs from employers in unsuccessful enforcement actions.19 No fee-shifting provisions are applied to employers, although there is no prohibition on employers contracting for such provisions.20

III. DRAFTING RESPONSE TO THE 2022 AMENDMENTS

So what should you do when drafting such employment contracts? The bare minimum is to revise agreements for compliance if entered after January 1, 2022. To the extent that the compensation paid to employees currently does not justify or support a non-solicit or non-compete, a review or modification of compensation structure to meet thresholds still may be necessary. The next step would be to train management, supervisory staff, human resources, and other individuals with agreement presentation responsibilities about the amendments, especially with respect to earnings thresholds and attorney review. Since implementation, and modifications made to support

19 820 ILCS 90/25 (2022). 20 Id. implementation, may create a “before and after” culture either with agreements or compensation, best practice would be to review the company application of restrictive covenants and compensation structure for fairness and consistency with pre-amendment employees.

IV. SHORTCOMINGS IN THE AMENDMENTS

In addition to compliance, we must analyze where the amendments fall short. The first area of concern is the definition of “earnings.” Earnings means “compensation, including earned salary, earned bonuses, earned commissions, and any other form of taxable compensation earned.”21 The word “earned” is reminiscent of the Illinois Wage Payment and Collection Act (“IWPCA”), which focuses extensively on when compensation is earned.22 Cross-referencing statutes, the definition of earnings would prohibit inclusion of a discretionary bonus because it is not an earned bonus.23 However, substantial litigation exists regarding earned bonuses and earned commissions under the IWPCA. With those definitions infiltrating the IFWA, it is likely that those arguments will now permeate restrictive covenant litigation.

A second shortcoming is the language that “[e]ach situation must be determined on its own particular facts” and “[t]he same identical contract and restraint may be reasonable and valid under one set of circumstances and unreasonable and invalid under another set of circumstances.” This open-ended language is at odds with the practical aspect of non-competes and non-solicits, but particularly non-competes. If an employee is bound by a non-compete and is presented a potentially competitive activity, that employee must make his or her own analysis of whether the potentially competitive activity would breach the non-compete clause. Without providing clear guidance on enforcement, it creates a practical burden on employees because employees will be forced to decide how risk-averse they want to be. This may keep particularly anxious employees from non-violating opportunities based on their capacity for risk.

V. CONCLUSION

With this wave of amendments, employers need to review, revise, and retrain in order to ensure agreement compliance with statutory regulations for agreements entered into after January 1, 2022. Beyond, the field of restrictive covenant litigation remains factually dependent, and ripe for disputes. This capacity is increased with imposition of “earned wages” into statutory regulation.

21 820 ILCS 90/5 (2022). 22 820 ILCS 115/1, et seq. (2015) (final compensation defined as “wages, salaries, earned commissions, earned bonuses, and the monetary equivalent of earned vacation and earned holidays, and any other compensation owed the employee by the employer pursuant to an employment contract or agreement between the 2 parties.”). 23 See 56 Ill. Admin. Code §300.500 (2014).