As originally drafted, the Illinois Freedom to Work Act (IFWA) only barred employers from entering into non-compete agreements with “low wage employees,” i.e., those making no more than minimum wage or $13 per hour, whichever is greater. In 2022, the law is expanding to include broader limitations on non-competes and, for the first time, non-solicitation agreements.
The new IFWA will impact virtually all health care employers, including hospitals, medical practices, dental practices and others, which frequently use non-compete and non-solicitation agreements for their health care professionals. The following addresses several aspects of the law for health care providers.
Chris Bailey previously did an excellent job summarizing the law here, including additional details on certain notice requirements and enforcement of the IFWA.
When do the changes take effect?
The new requirements under the IFWA apply to agreements containing non-compete and non-solicitation agreements that are “entered into” after January 1, 2022.
So existing agreements are OK?
Generally, yes. However, the law does not define what it means to “enter into” an agreement, and there are some circumstances where the law’s application is open to interpretation.
First, agreements with physicians and other health care professionals are frequently amended or restated at various intervals. So even though an employment agreement may have been originally entered into prior to January 1, 2022, if the agreement is restated in its entirety on or after January 1, 2022, it should always be reviewed to ensure compliance with the new law.
Second, if an amendment to a pre-existing agreement directly changes any terms of the non-compete or non-solicitation provisions, then the agreement containing the applicable provision is arguably being “entered into” at the time of the amendment and should comply with the new law.
Finally, amendments that change other contractual provisions — and which might indirectly alter the scope or terms of the non-compete or non-solicitation covenants — should be carefully reviewed. In most cases, because of the risk that an agreement might be declared void and unenforceable, the non-compete and non-solicitation provisions should be brought into compliance at the time of any amendment on or after January 1, 2022.
Are there any special rules or requirements for health care workers or employers?
No. Health care employers and workers are not exempt from the law, and there are no special rules for them. Hospitals and other employers will have to comply just like any other employer.
How much compensation must an employee receive before an agreement becomes enforceable?
For a non-compete to be enforceable, an employee’s actual or expected rate of earnings must exceed $75,000 per year. This minimum increases by $5,000 every five years, reaching $90,000 as of January 1, 2037.
For a non-solicitation agreement to be enforceable, an employee’s actual or expected rate of earnings must exceed $45,000 per year. This amount increases by $2,500 every five years, reaching $52,500 as of January 1, 2037.
How are annualized earnings calculated?
“Earnings” specifically includes all forms of taxable income reported or “expected to be” reported on the employee’s W2 as “wages, tips, and other compensation.” For example, bonuses will need to be included, as will any taxable fringe benefits, such as any cash and cash equivalents, an employer-provided car, and fees for professional licenses and dues that are not paid under an Internal Revenue Code Section 62 “accountable plan.”
Earnings also includes an employee’s non-taxable elective deferrals, such as “employee contributions to a 401(k) plan, a 403(b) plan, a flexible spending account, or a health savings account, or commuter benefit-related deductions.” It also includes other types of welfare benefits that may be elected and paid under an Internal Revenue Code Section 125 Cafeteria Plan, such as medical, dental and vision premiums and supplemental life and disability coverage.
In many cases, the earnings of physicians and other health care workers will be high enough that the earnings threshold will not be in question. For others, an estimate of the employee’s earnings will need to be calculated.
Are there any types of health care workers for whom non-competes and non-solicitation agreements cannot be used?
Yes. There are a couple of relevant limitations.
First, a health care provider cannot “enter into” a non-compete or non-solicitation agreement with any employee who is terminated, furloughed or laid off as a result of the COVID-19 pandemic unless during the term of the non-compete the employee is paid his or her base salary at the time of termination, minus any compensation earned through subsequent employment. Since this restriction only bars agreements entered into as a result of a COVID-related employment change, pre-existing non-competes and non-solicitation agreements should still be enforceable.
It’s not entirely clear that a COVID-related non-solicitation agreement may also be enforceable if the employee’s base salary is paid, since the IFWA only expressly references non-competes in that part of the rule. More guidance is needed. Until then, an employer seeking to enforce a non-solicitation agreement entered into as a result of a COVID-related employment change should also enter into a non-compete at the same time, in addition to continuing to pay the base salary during the term of the non-compete (minus other earnings).
Second, an agreement entered into “by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest” is excluded from the definition of a non-compete. So transactions involving the ownership of health care practices may include non-competes without being subject to the IFWA. Any non-solicitation agreement included in the transaction, however, would still be subject to the IFWA.
Other exceptions — for example, certain collectively bargained public and education employees, as well as construction employees — are not relevant to private health care providers.
What limitations are there on the scope of a non-compete or non-solicitation agreement?
To be enforceable, an agreement must satisfy the following five rules:
- The employee receives adequate consideration;
- The covenant is ancillary to a valid employment relationship;
- The covenant is no greater than is required for the protection of a legitimate business interest of the employer;
- The covenant does not impose undue hardship on the employee; and
- The covenant is not injurious to the public.
These requirements by and large track those that already existed under the common law, as do the factors that go into examining the legitimate business interests of the employer. As a result, health care providers will not likely need to rework the scopes of agreement as a result of the IFWA, such as service, time and geographic limitations.
For questions or assistance with compliance with the act, please reach out to any of Greensfelder’s Health Care attorneys.