Restrictive Covenants

2024 Employment Law Checklist

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Each year, LP’s Employment & Executive Compensation Practice Group is pleased to provide a short checklist of steps that all companies should consider taking to measure their readiness for the coming year. We hope you find our 2024 Employment Law Checklist a helpful guide to best practices for the year ahead.

Click here to download a PDF guide.

❒     Refresh, Recharge, and Revamp Paid Time Off and Sick Time Policies. Illinois jurisdictions have been very busy implementing new paid leave requirements. The Illinois Paid Leave for All Workers Act took effect January 1, 2024 and requires all Illinois employers to provide 40 hours of paid time off to use for “any reason,” and Cook County joined in with a new Ordinance setting out similar requirements. Pre-existing policies may meet the requirements under this law; however, employers should revise these policies to ensure they are inclusive of all the requirements under this law. The City of Chicago raised the bar even further by requiring 40 hours of paid leave and an additional 40 hours of paid sick leave for Chicago employees beginning July 1, 2024. Not surprisingly, Illinois is not alone in this activity. California, Colorado, and Minnesota (and a number of localities) have also updated their paid leave laws. Employers need to review their policies and applicable requirements to make sure that the amount of time provided, how it’s accrued, how it’s used, whether it carries over and how it’s handed on termination are both workable for the company and legally compliant.

❒      Revisit Bereavement Policies.  Under amendments to the Illinois Victims’ Economic Security and Safety Act (VESSA) and the Illinois Bereavement Law effective January 1, 2024, employees are permitted up to two weeks of unpaid, job-protected leave to attend a funeral, arrange a funeral, or grieve if a family or household member is killed in a crime of violence. Illinois also created a new requirement that employers with 250 or more employees offer 12 weeks of unpaid bereavement leave for the loss of a child due to suicide or homicide, while employers with 50-249 employees must provide six weeks of unpaid leave in those circumstances. It’s important that employers update their policies to reflect these new requirements and coordinate them with other paid leave offerings.

❒      Understand New Safety in the Workplace Requirements. California employers are now subject to the first proactive workplace violence prevention plan requirements in the US. Under the new requirements, employers must establish, implement, and maintain an effective, written Workplace Violence Prevention Plan, log information for every workplace violence incident, maintain up-to-date records, and meet training obligations, among other requirements. But it’s not just California employers who should take note. Amendments to the Illinois Gender Violence Act permit victims to sue employers whose employees or agents commit gender-related violence in the workplace if the violence arises “out of and in the course of employment with the employer.” To minimize liability, it’s important that employers conduct regular anti-harassment training (which should include that violence against employees is prohibited) and stay on top of allegations of harassment or violence in the workplace.

❒     Confirm Compliance with Pay Transparency and Equity Laws. Transparency in the workplace continues to be a legislative priority across the country. Beginning in 2025, Illinois employers with at least 15 employees will need to include the wage or salary range and a general description of benefits in job postings, so it’s important the HR and recruiting teams start thinking about how they will gather and provide this information. Also in Illinois, the deadline for employers with 100+ employees to submit for their Equal Pay Certification is March 23, 2024.  Covered employers that haven’t already submitted should move quickly to prepare this detailed, information-intensive application by the deadline. Employers with Colorado employees should also be aware of amendments to the Colorado Equal Pay for Equal Work Act which make some requirements more reasonable while creating new obligations around pay transparency.

❒     Revise Handbooks and Template Agreements that include Confidentiality or Non-Disparagement Provisions to Avoid Liability Under New Standards. A decision from the National Labor Relations Board in February 2023 means that employers need to ensure that standard employment covenants – such as confidentiality, non-disclosure and non-disparagement – cannot be read to limit non-supervisory employees’ right to make complaints or discuss them with fellow employees, former colleagues, unions, attorneys, the NLRB or others. This development is noteworthy because the language itself creates risk, even if it is never used.  It is critical that employers update employee handbooks and other employment-related documents to either include a clear statement that the provision does not limit employees’ exercise of protected rights. 

❒     Make Sure Temporary Employee Engagements Meet Strict New Standards. Both staffing firms and the companies that use their non-professional, non-clerical workers have new obligations under amendments to Illinois’ Day and Temporary Labor Services Act (“DTLSA”). Among other requirements, staffing companies are now required to provide long-term workers (those who are assigned to the same client for more than 90 days in a 12-month period) with pay and benefits not less than what is provided to the client’s lowest-paid directly-hired employees.  Companies using staffing company workers are required to confirm that the agency is registered with the Department of Labor at the time it enters into the contract and are required to provide staffing firms with the information necessary to meet the DTLSA’s compensation requirements. Staffing firms should already be aware of and complying with the DTLSA, but companies that use non-professional, non-clerical workers assigned by temporary companies need to make sure they understand and adhere to these new requirements.

❒     Ensure Independent Contractor Agreements Meet New Requirements. Effective July 1, 2024, companies that engage independent contractors or freelancers in Illinois will be required to have a written agreement with each independent contractor or freelancer that includes very specific information, including an itemization of the products and services to be provided and payment details. Companies that use independent contractors or freelancers need to review and revise contracts to make sure they include all required information and implement new agreements as necessary.

❒      Stay Abreast of New Limitations and Requirements around Restrictive Covenants – and Liability for Implementing Unenforceable Ones. On the national level, 2023 saw the NLRB taking the position that requiring a non-supervisory employees to sign a non-compete was an unfair labor practice (regardless of whether it was ever enforced) and the Federal Trade Commission issuing a proposed rule that would drastically limit non-competes (even in the sale of business context). While a bill in New York that would have prohibited all non-competes was ultimately vetoed, California took steps to give additional teeth to its prohibition on non-competes and customer non-solicits, amending the law to make clear that such provisions aren’t only void, they are also “unlawful,” and requiring employers to notify employees who signed any such provision about the new law by February 14, 2024.

If you found this checklist helpful, subscribe to LP3. If you have questions, do not hesitate to reach out to LP’s Employment & Executive Compensation Group.

Don’t Let Employment Issues Derail Your Accounting Firm’s Deal – Part 2

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Authors Laura Friedel, Russell Shapiro

Partners Russell Shapiro and Laura Friedel recently spoke at the 2023 BDO Alliance USA Conference on employment issues that impact accounting firm deals. In Part 1 of our two-part article, we share insights and tips on avoiding potential diligence deal killers, restrictive covenants, and other potential issues to help accounting firms avoid situations where employment issues could derail – or devalue – a potential merger or acquisition. You can read Part 1 here, where we share tips on transferring employees.

Tip #1: Be aware of potential due diligence deal killers.

Three issues, in particular, can be potential “deal killers,” and even if the deal moves forward, they could have a material impact on the purchase price:

  1. Questions about the ownership of books of business. A seller can only sell something they own, so any question regarding whether the selling firm owns the client relationships can kill a deal (or at least result in a significant purchase price reduction). Look at the language in employee and partner agreements that reference “your” book or “your” clients. Even in the absence of language suggesting that an individual (rather than the firm) owns a book of business, as lack of explicit language indicating that all relationships are the firm’s property can have a material impact on the deal. The issue will also have a legal effect on which clients an individual can be prohibited from soliciting/working with.
  2. Misclassification of independent contractors. Misclassification of independent contractors (namely, treating someone as an independent contractor where they don’t meet the legal standards to be one) is a high-risk issue generally, and in the M&A context, it can have serious ramifications. Buyers should determine early in due diligence whether the seller engages individual independent contractors and, if so, work with counsel to determine if they are properly classified as such. If they aren’t, the buyer will likely require a significant special escrow or purchase price reduction to cover the associated risk.
  3. Exempt vs. non-exempt. The presumption is that all employees are entitled to overtime, and if the employer wants to establish that they are exempt (not eligible for overtime), they have to establish both that they meet the salary minimum and that they satisfy one of the job duties tests. This can create two issues in deals. First, misclassification of employees (by treating them as exempt when they should have been eligible for overtime) can lead to very significant liability. Where the buyer believes that this liability exists, it likely will insist on a significant escrow or purchase price reduction. Second and more problematic, where the buyer is going to “reclassify” employees post-closing (either because of perceived legal risk or to align to the buyer’s practices), there can be issues with employees who were previously treated as exempt and are suddenly required to track hours and be paid overtime. These employees are less likely to join and remain with the buyer because of a perceived “demotion.” In addition, having been reclassified, these employees are more likely to look back and realize that they should have been paid overtime during their time with the seller. To mitigate these risks, buyer and seller should pay close attention to how any reclassification is messaged and make sure that the purchase agreement is clear on who is liable if reclassified employees use their reclassification as evidence that they should have been receiving overtime pay in the first place.

To try and avoid these (and other) employment issues derailing your deal, firms considering selling should have an employment attorney conduct a review of employment law compliance at least 18-24 months before a transaction is anticipated so that the firm has time to correct any issues before due diligence begins. In addition, buyers should make sure to conduct adequate due diligence on employment compliance early in the process and prioritize obtaining meaningful responses from the seller.

Tip #2: Take care when assigning restrictive covenants.

The ability to enforce restrictive covenants (non-solicits and non-competes) is critical to accounting firm deals, but often insufficient thought is given to where covenants are set out, what covenants bind non-equity partners, whether covenants are assigned, and who will be responsible for responding to breaches.

Restrictive covenants are generally viewed with scrutiny – but the level of scrutiny depends on the circumstances under which the covenants are entered into. Covenants in purchase agreements, where the buyer is purchasing the goodwill of the seller’s business, are viewed with the least scrutiny and, thus, generally, can be broader and are the easiest to enforce. At the other end of the spectrum are covenants entered into with employees, which are viewed with the greatest scrutiny, need to be the narrowest, and are least likely to be enforced. Somewhere in the middle are covenants between equity partners in shareholders and partnership agreements. In the M&A context, this means that putting covenants in a purchase agreement (or layering the covenants in the purchase agreement over those in the shareholders, partnership or employment agreement) increases the likelihood of enforceability – which is in both parties’ interest if there is any kind of earn out, profit sharing or deferred compensation. For this reason, we strongly recommend that covenants be included in the purchase agreement or an exhibit to the purchase agreement rather than in an shareholders /partnership agreement or an employment-related agreement.

This is particularly true where a partner who had an ownership interest in the seller becomes an income partner with the buyer. Regardless of what an income partner is called or whether they sign the shareholders /partnership agreement, an income partner is generally considered an employee. That means that unless the covenants are in the purchase agreement (where they are given in exchange for the buyer’s purchase of goodwill) they will be viewed with the highest level of scrutiny and will need to be narrow if they are going to be enforceable.

Another key decision is whether or not the buyer assumes the seller’s existing restrictive covenants (in a shareholders/partnership agreement or an employment agreement). There are various reasons why the seller, the buyer, or both would want to rely on pre-closing restrictive covenants. For instance, they could want to enforce covenants against someone who left prior to or at closing, they could want to take advantage of the fact that the agreement was signed in the past (before new requirements for restrictive covenants were implemented), or they could prefer the language in the seller’s covenants to that in the buyer’s. If the covenants are not assigned to the buyer, the seller may have difficulty enforcing them. This is because courts often require that a firm trying to enforce a restrictive covenant show that it has a “legitimate business interest” in enforcing the covenant, and a seller which is no longer engaging in the business may have trouble establishing that their financial interest in an earn-out or deferred compensation is a “legitimate business interest.” For this reason, it is almost always to the parties’ advantage to provide for the assignment of restrictive covenants as part of the purchase agreement.

Finally, there is the question of which party – buyer or seller – should be responsible for enforcing restrictive covenants. If covenants are assigned, then the buyer would have the legal right to seek enforcement. If not, vice versa. But that doesn’t mean the buyer needs to call the shots or pay for the enforcement. In many situations what makes the most sense is to agree in the purchase agreement that the party that wants the covenant enforced pays for the enforcement and that the other will cooperate fully (including by filing suit if necessary). This approach serves to avoid disputes between buyer and seller down the road.

Tip #3: Don’t forget about other potential issues.

What happens to those partners who don’t want to join the buyer?

The best way to avoid this situation is to revise the shareholders/partnership agreement before the sale process begins to provide that partners who don’t sign on to the deal are deemed to voluntarily withdraw immediately before closing, and that the restrictive covenants in the agreement will continue to apply. If you don’t have that provision in your shareholders /partnership agreement, make sure that you consider and follow all of the requirements relating to partner separations – including especially notice and payments.

What happens if there are unexpected life events during the gap between signing and closing?

People can die, become disabled, and get divorced, just to name a few of the life events that can happen between signing and closing. Sellers should consider these possibilities in advance and make sure that the deal is structured so these events don’t disrupt closing. This includes being prepared in case key personnel announce that they are leaving the firm.

Should partners and employees have legal representation separate from the firm’s legal counsel?

When there are multiple tiers or levels of partners who will be treated differently under the terms of the deal, or where employees are being required to sign new employment agreements, it is often helpful for them to have separate legal counsel. Other situations where it makes sense to have separate legal counsel are when individual and firm interests don’t completely align and where separate legal counsel would put the buyer in a better position to enforce the agreement (for instance, where state law allows for certain provisions only if the individual had counsel). The bottom line is that if an individual’s interests differ from the firm’s, separate legal representation is probably appropriate.

If you are considering an accounting firm considering a sale or acquisition, please don’t hesitate to reach out. LP knows accounting firms. Our attorneys are trusted advisors for managing partners, executive committee members, key stakeholders, and HR professionals working in and for accounting firms.

New Defend Trade Secrets Act Requires Notice in Employee Agreements

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pillarsOn Wednesday, President Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA). The DTSA sets a single national standard for trade secret protection and gives the option of bringing trade secret cases in federal court and provides for remedies (such as seizure and recovery of stolen trade secrets).  The DTSA also creates whistleblower protections for employees who disclose trade secrets to an attorney or governmental official for the purpose of reporting or investigating a suspected violation of law.  But most urgently for employers, the DTSA contains a new notice requirement that employers need to take action quickly to satisfy.

Effective immediately, any new or updated agreements with employees, consultants or independent contractors that govern trade secrets or confidential information need to include a “notice-of-immunity.”  The notice may be provided via reference to a general policy document rather than restating the entire immunity provisions in each agreement.  An employer that fails to provide this notice will forfeit their right to exemplary double damages and attorneys’ fees in an action brought under the DTSA.

Employers wishing to take advantage of the DTSA’s protections need to revise their standard agreements and ensure that any agreement provided on or after May 11, 2016 includes the required notice-of-immunity.  We recommend that you consult with legal counsel to ensure compliance with this new requirement.

 

The Courts Continue to Debate Restrictive Covenant Enforcement in Illinois – UPDATED 2/20

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From time to time, other attorneys with our firm will contribute blog posts on items that may be of interest to members of the labor and employment law community. Today, we are fortunate to have a post contributed by Jason Hirsh, a partner in Levenfeld Pearlstein’s Litigation Group. Jason’s post discusses current Illinois cases at the forefront of labor and employment law that frequently come up when employers draft, or seek to enforce, restrictive covenants in their employment agreements in this changing legal climate . . .

employent contract

Courts in Illinois are in the midst of a significant legal debate relative to whether a post-employment restrictive covenant involving an at-will employee can be enforced if the employee has less than two years of continued employment. This two-year bright line rule first blossomed in the often cited Fifield v. Premier Dealer Servs., Inc., 373 Ill.Dec.379 (1st Dist. 2013) decision. The debate continues to play out in the Chicago federal court.

In Montel Aetnastak, Inc. v. Miessen, 998 F.Supp.2d 694, 716 (N.D. Ill. 2014), Judge Castillo refused to apply the two-year bright line rule presumably adopted in Fifield. Judge Holderman, on the other hand, in Instant Technology, LLC v. Defazio, 12 C 491, __ F.Supp.2d __, 2014 WL 1759184 at *14 (N.D. Ill. 2014), took a contrary view.

On February 6, 2015, in Bankers Life and Casualty Company v. Richard Miller, et al., Case No. 14 CV 3165, Judge Shah waded into this controversy and rejected the two-year bright line rule. Instead, Judge Shah concluded that not only has “the Illinois Supreme Court not spoken on this issue”, but that case law does not support the argument that two years of employment is “necessary” to support a restrictive covenant.

This is a critically important issue affecting employers. Given the obvious uncertainty in the area of restrictive covenant enforcement, we recommend other forms of consideration, such as bonus payments, be considered.

Read the Bankers Life and Casualty Company v. Richard Miller, et al., Case No. 14 CV 3165 decision.

UPDATE (2/20/15) 
On the heels of Bankers Life, on February 13, 2015, in Cumulus Radio Corp. v. Olson, et al., Case No. 15-cv-1067 (C.D. Ill.2015), Judge McDade of the federal court in Peoria, Illinois granted an employer’s motion for a temporary restraining order stating “the Court does not believe that the Illinois Supreme Court would adopt the bright-line test announced in Fifield.”  Judge McDade added that the two-year bright line rule “suffers from a number of analytical problems that make it unsatisfying.”  Judge McDade also stated it also suffers from a “failure to give weight to the reason that an employee’s at-will employment ended.”  Favoring a case-by-case analysis, akin to that suggested by Bankers Life, Judge McDade further criticized the two-year bright line rule stating “[s]uch a rule is overprotective of employees, and risks making post-employment restrictive covenants illusory for employers subject completely to the whimsy of the employee as to the length of his employment.”