In the wake of increasing federal and state scrutiny on the use of non-compete agreements for lower wage workers, Illinois has enacted the Illinois Freedom to Work Act (the “Act”).1 The Act, which applies to agreements entered into on or after January 1, 2017, prohibits non-governmental employers from entering into “covenants not to compete” with “low-wage employees.” The Act defines “low-wage employees” as employees who earn less than the greater of (1) the hourly minimum wage under federal, state or local law or (2) $13.00 per hour. Given current federal and state regulations, the Act will apply to employees earning $13.00 per hour or below.
“Covenants not to compete” are defined in the Act as agreements:
1) between an employer and a low-wage employee that restricts such low-wage employee from performing:
(A) any work for another employer for a specified period of time;
(B) any work in a specified geographical area; or
(C) work for another employer that is similar to such low-wage employee's work for the employer included as a party to the agreement.
Under the law, all such agreements will be rendered “illegal and void.”
The Act is part of a greater focus by state and federal governments on ensuring the mobility of low-wage workers and preventing potential abuse of non-compete agreements. In May 2016, the White House published a report discussing potential negative impacts resulting from the overuse of non-competes.2 A number of state attorney generals have filed lawsuits or put pressure on restaurant franchisors and other employers of lower-wage workers to prohibit them from using non-competes for such employees. For example, in late June of this year, New York’s Attorney General Eric Schneiderman proclaimed that “[n]on-compete agreements for low-wage workers are unconscionable” as “[t]hey limit mobility and opportunity for vulnerable workers and bully them into staying with the threat of being sued.”3
Likewise, a number of state legislatures have considered additional restrictions on non-competes. Although a recent effort in Massachusetts to pass far broader restrictions on the use of non-competes stalled shortly before passage,4 there may be continued efforts in both Massachusetts and other states to more carefully restrict use of restrictive covenants, especially for lower wage workers.
It is worth noting that, as originally introduced, Illinois’ Act would have required that employers disclose a non-compete requirement at the beginning of the hiring process before hiring the employee. This requirement was removed through an amendment prior to the passage of the law, but it highlights a hot button issue in a number of jurisdictions. Even absent a statutory requirement, it remains good practice for employers to disclose any restrictive covenant requirement to prospective employees early in the hiring process, before employment begins, to increase chances of enforceability.
Finally, while the Act is a reflection of greater scrutiny regarding potential abuse of restrictive covenants, its immediate practical import is somewhat limited given that many employers already refrain from imposing non-competes on their lower-level employees. Further, on its face, the Act does not necessarily apply to other forms of restrictive covenants, such as restrictions on soliciting customers. While it remains to be seen how broadly the Act will be construed, employers are well-advised to carefully consider current law and strategically evaluate their use of restrictive covenants; specifically, employers should consider the categories of employees for whom a restrictive covenant is truly necessary.