Employees given access to the trade secrets, customer lists and other confidential materials vital to the operation of a business can easily use that information against the interests of their former employer when their employment comes to an end. Covenants not to compete have been used by businesses to protect themselves from competition from former employees.
A new employment law in Illinois limits how far businesses can go in placing restraints or limitations on a former worker’s ability to obtain employment. It might be good news for employees, but the new law could put businesses in jeopardy of having confidential information misused by former employees.
Courts sensitive to restrictions on workers
Covenants not to compete are contracts between an employer and its employees that is usually entered into at the time an individual is hired. Courts tend to scrutinize such agreements very carefully to ensure that the limitations imposed on an individual’s right to work are reasonable and serve to protect a legitimate interest of the employer. When properly drafted, covenants not to compete can be an effective method of protecting a business from financial loss.
New legislation places additional restrictions on employers
On August 19, 2016, Illinois Governor Bruce Rauner signed into law the Freedom to Work Act that prohibits employers in the state from entering into covenants not to compete with low-wage employees. The law defines a covenant not to compete as an agreement between an employer and a low-wage employee that restricts the employee from doing any of the following:
- Performing any work for another employer for a specified period of time
- Performing any work in a specified geographical area
- Performing work for another business or entity that is similar to the employee's work for his or her employer
The law takes effect on January 1, 2017 and will only change employee policies and procedures pertaining to covenants not to compete that are signed after that date. Agreements signed prior to the effective date are unaffected by the new law.
Application of the new law and what it means to employers
The Freedom to Work Act defines “low-wage employee” as an employee who earns the greater of the hourly rate equal to the minimum wage required by the applicable federal, state or local minimum wage law or $13.00 per hour. Current minimum wage laws in Illinois effectively place every employee who makes $13.00 or less an hour under the protection of the new law.
The new law is silent with respect to employees who make more than $13.00, but the courts will look closely to many factors before enforcing any covenant not to compete. Business owners and managers should seek legal advice regarding the use of covenants not to compete as part of their employee policies and procedures to protect themselves from workers who might disclose or use confidential information
Any covenant not to compete, as with all employment contract provisions, should be carefully written and reviewed by an attorney familiar with current employment law in Illinois. For additional information about this topic, contact Kristin Dvorsky Tauras at McKenna Storer.