Over the weekend, the New York Times ran a story called “How Noncompete Clauses Keep Workers Locked In.” The story discusses how non-compete agreements have been changing in the modern economy. While they used to be used only with high-level executives, recently lower-level employees have been subjected to them as a term of employment. I thought this would be a good opportunity to provide a brief overview of how Illinois law treats non-compete agreements.
What are Non-Compete Agreements?
Non-compete agreements are normally not standalone agreements. Instead, they’re incorporated into some other contract, such as an employment agreement or contract for the purchase and sale of a business. But whatever form they take, a non-compete agreement is one in which a person agrees that he or she will not work within a certain trade or industry, for certain employers, or within a certain geographical area for a set number of years.
Traditional Rules for Non-Compete Agreements
In December 2011, the Illinois Supreme Court issued its opinion in the case of Reliable Fire Equipment Co. v. Arredondo. In that case, Reliable was suing two former employees who had gone on to work for a rival company, as well as the rival company itself. Each employee had signed a non-compete agreement with Reliable. The trial court and court of appeals had held that the non-compete agreement was unenforceable. But the Supreme Court determined that the lower courts had applied an incorrect legal standard, and so sent the case back to the trial court with instructions on the correct standard.
The Illinois Supreme Court explained that a non-compete agreement is enforceable only if it is reasonable, and it is reasonable only if it:
(1) is no greater than is required for the protection of a legitimate business interest of the employer-promisee; (2) does not impose undue hardship on the employee-promisor; and (3) is not injurious to the public.
In Reliable, the Court focused on the requirement of a “legitimate business interest,” because the lower courts had ignored it. Determining whether a legitimate business interest exists, according to the Court, “is based on the totality of the facts and circumstances of the individual case.” Some of those “facts and circumstances” includes the nature of a business’ relationship with its customers and whether the employee had acquired confidential information through his or her employment.
The bottom line under these traditional rules for non-compete agreements is that whether they are enforceable depends on several factors unique to each case. Unfortunately, that provides little guidance to employees who have signed a non-compete agreement or the employers who rely on them. But, under legislation enacted last year, the answer becomes much clearer for one class of employees.
The Illinois Freedom to Work Act
In August 2016, Governor Bruce Rauner signed the Illinois Freedom to Work Act, which the General Assembly had passed in May. The Act prohibits Illinois employers from entering “covenants not to compete” with “low-wage employees.” It defines “low-wage employee” as an employee who earns the greater of $13.00 per hour or minimum wage. In the Act, a “covenant not to compete” is any agreement between an employer and a low-wage employee that restricts the employee from working for another employer for a set period of time or doing similar work to that done for his or her current employer or working in a designated geographical area. Any covenant not to compete involving a low-wage employee is void, and so cannot be enforced.
However, the Freedom to Work Act’s prohibition only extends to covenants not to compete entered into after the Act became effective, which occurred on January 1, 2017. For businesses, that means that any non-compete agreements with low-wage employees entered prior to this year may still be enforceable, depending on the old “facts and circumstances” standard described by the Illinois Supreme Court.
Stories like the New York Times’, along with the vague nature of the traditional non-compete analysis, may lead to future legislation that seeks to clarify when non-compete agreements are enforceable against employees who are not covered by the Freedom to Work Act. To stay current with legal developments in Illinois business law, keep following the Legal Ally blog. And if you need help in drafting a non-compete agreement for your business needs, please don’t hesitate to contact us.