Effective January 1, 2022, employers will no longer be able to enter into covenants not to compete (non-compete agreements) and covenants not to solicit (non-solicitation agreements) with employees whose earnings are below a certain amount.

On August 13, Governor JB Pritzker signed into law Amendment 1 to Senate Bill 672. The Illinois Freedom to Work Act now makes it illegal for employers to enter into non-compete agreements with any employee unless the employee’s earnings exceed $75,000 per year. Likewise, it is illegal for employers to enter into non-solicitation agreements with any employee unless the employee’s earnings exceed $45,000 per year.

In addition, no employer shall enter into non-compete or non-solicitation agreements with any employee who is terminated, furloughed, or laid off as a result of varying COVID-19 circumstances. Similarly, a non-compete agreement is void and illegal with respect to individuals covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act. Individuals employed in construction are also included in this list.

The legislation also provides the criteria employers must meet when entering into these agreements. According to the bill text, non-compete agreement or a non-solicitation agreement is illegal and void unless:

(1) The employee receives adequate consideration*
(2) The agreement is supplementary to a valid employment relationship
(3) The agreement is no more than what is required for the protection of a legitimate business interest of the employer
(4) The agreement does not impose undue hardship on the employee
(5) The agreement is not harmful to the public

To ensure employees are informed about their obligations, an agreement not to compete or an agreement not to solicit is illegal and void unless:

(1) The employer advises the employee in writing to consult with an attorney before entering into the agreement.
(2) The employer provides the employee with a copy of the agreement at least 14 calendar days before the start of employment or 14 calendar days to review the agreement.

While the bill does not apply retroactively, it will create a substantial change to the future employment agreements and is something employers should keep in mind as the January 1, 2022, effective date looms.

*As defined in the bill, “Adequate Consideration” means, “(1) the employee worked for the employer for at least two years after the employee signed an agreement containing a covenant not to compete or a covenant not to solicit, or (2) the employer otherwise provided consideration adequate to support an agreement to not compete or to not solicit, which consideration can consist of a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.”

Certified Public Accountants serve as trusted advisors and often guide their clients to other professionals, including attorneys, for assistance. However, CPA firms, like most professionals, often overlook their own need for good legal advice.

Engagement Letters

For example, CPA firms should have a clear and concise engagement letter for all clients. These carefully drafted documents set forth the specific understanding of a particular engagement when it comes to the scope of the CPA firm’s work. Services, such as tax return preparation and financial statement review, must be outlined accordingly.

In addition, the engagement letter should contain provisions that limit the CPA firm’s exposure to liability. This can include an exculpatory provision that limits the CPA firm’s liability to the amount of fees it has collected from its client. This is an advantage CPA firms have over attorneys, who cannot similarly limit their liability to a client.

Shareholder Agreements

Many CPA firms are corporations, partnerships or limited liability companies. This means they may have multiple shareholders, partners or members. As a result, they should have a sound shareholder agreement that addresses the respective rights and obligations of each shareholder, partner or member.

These agreements should contain provisions regarding:

• Governance
• Restrictions on transfer of ownership interests
• Terms for transfer of the ownership interest of a deceased or disabled owner

The agreements should also cover any disputes that may arise in the operation of the firm and provide an expeditious and cost effective way for resolution of such disputes.

Additional Protections Legal Advice and Documentation for CPA Firms

Finally, like any business, a CPA firm, should seek legal counsel for matters such as:

• Employment agreements, including non-solicitation covenants which can protect the CPA firm and its clients
• Intellectual property rights (trademarks, trade names, etc.)
• Insurance needs

Maintenance of a good relationship with a trusted attorney; one who can provide the legal “nuts and bolts” of operating a CPA firm, along with guidance on general legal questions or issues that arise during the course of operations, can be a valuable asset for any CPA firm. At Goldenberg Heller & Antognoli, P.C. our attorneys have experience in business and commercial law, and several have worked as licensed CPAs. Contact us to learn more. 800-782-8492.