New Illinois Law Renders Non-Compete Agreements for Low-Wage Employees “Illegal and Void”

non-compete-selected-optionOn August 19, 2016, Governor Bruce Rauner signed into law the Illinois Freedom to Work Act (the “Act”).  The Act prohibits certain Illinois employers from entering into non-compete agreements with low-wage employees.  The law takes effect January 1, 2017.

The Act will render “illegal and void” any covenant not to compete entered into after January 1, 2017, between a private sector employer and a low-wage employee.  An employer under the Act is any entity, individual or group of individuals “acting directly or indirectly in the interest of an employer in relation to an employee, for which one or more persons are gainfully employed on some day within the calendar year.”  Despite the broad definition of “employer,” the Act will not apply to governmental entities.

The Act defines a “low-wage employee” as any employee paid the greater of, $13 per hour or the applicable federal, state or local minimum wage.  Therefore, in Illinois, the law applies to all employees earning $13 per hour or less.

The Act prohibits covenants not to compete, which are defined as an agreement that restricts a low-wage employee from performing any work (1) for another employer in a specified period of time, (2) in a specified geographical area, or (3) for another employer that is similar to the employee’s work for the employer with whom the employee has the agreement.

Importantly, the Act will not void non-compete agreements entered into prior to January 1, 2017.  The Act also will not affect agreements for the protection of an employer’s confidential information or trade secrets or non-solicitation agreements protecting an employer’s employees or customers.

There has been a recent general trend of challenging non-compete agreements for lower paid workers, and this law follows a lawsuit by the Illinois Attorney General over the use of non-compete agreements by quick service food chains, such as Jimmy John’s, attempting to prevent low-wage employees from working for competitors.

If you have any questions about whether your non-compete agreements or competition policies will be affected by the Act, contact Marcus & Boxerman at (312) 216-2720 or

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Restaurant Owners: Are You Taking Advantage of All Tax Credits and Deductions?

tax-credits-selectedRestaurant owners can take advantage of many special deductions and credits providing substantial tax savings. Here are several to explore:

Tax Credits for Hiring in Empowerment Zones.  Tax credits are available for hiring employees who live and work in an Empowerment Zone, an area in need of economic revitalization as determined by the US Department of Housing and Urban Development. Eligible employees must be employed for 90 days before an employer may credit up to 20% of the first $15,000 paid to the employee (i.e. $3,000) per year.  There is no limit to the number of eligible employees for whom an employer can claim credit. This temporary program that has been extended until December 31, 2016, but credits are renewable each year pending IRS approval.

Full Purchase-Price Deduction on Qualifying Equipment.  Section 179 of the Tax Code permits businesses to deduct from gross income the full purchase price of new and used qualifying equipment and off-the-shelf software. The deduction limit for 2016 is $500,000.

Depreciation.  In recognition of the extensive usage restaurant equipment sees compared to most equipment, qualifying leasehold improvements and qualifying restaurant equipment are eligible for shorter 15-year depreciation periods instead of the standard 39-year scale. For 2015 to 2017, moreover, a bonus depreciation permits a business owner to take an additional 50% deduction on the cost of qualifying new property for the year it entered into service. This bonus amount decreases to 40% for years 2018-2019.

Tenant Improvement Allowances.  Section 110 of the Tax Code permits certain tenants of retail space to exclude from income landlord allowances used to construct or improve leased real property for the tenant’s benefit. This exclusion applies only to short-term leases (15 years or less) for non-residential real property. A lease or separate agreement executed as a provision of the lease must specifically state that the allowance must be applied toward construction on, or improvement to, qualified long-term real property used in the tenant’s trade or business.

Restaurant Remodel/Refresh Safe Harbor.  This safe harbor permits most restaurants and retailers to deduct 75% of qualifying remodel or refresh costs, requiring them to capitalize only 25% of the remodel or refresh. These costs must be incurred in connection with qualifying activities in a qualified building primarily used for retail and food and beverage sales. The safe harbor eliminates the computation and analysis of which costs should be expensed, capitalized and/or depreciated.

Credit for Portion of Employer Social Security Paid with Respect to Employee Cash Tips (FICA Tip Credit).  Restaurant owners may recover a portion of Social Security and Medicare taxes paid on income from employee tips. To receive the credit, employees must accumulate tips from customers by providing, delivering or servicing food or beverages and the employer must have paid or incurred employer Social Security and Medicare taxes on these tips. There is no credit for tips that help employees meet the federal minimum wage.

Employer-Provided Food.  Restaurant owners may deduct the value of meals furnished by the employer to an employee and his or her spouse and dependents for the convenience of the employer. To qualify for this deduction, the IRS requires the meals be necessary for the employee to perform his or her duties. Generally, “convenience of the employer” means the employee must remain on the premises in case of emergency or if allocated breaks are too short for the employee to reasonably get food elsewhere.

If you have any further questions about what deductions and tax credits your restaurant business may be eligible for, contact your CPA or Marcus & Boxerman at (312) 216-2720 or

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Seventh Circuit: Class and Collective Action Waivers in Employment Arbitration Agreements Unenforceable

lewis-selectedThe Seventh Circuit Court of Appeals recently ruled that provisions in employment agreements requiring individual arbitration of wage and hour disputes are unlawful under the National Labor Relations Act (“NLRA”). The court found that such provisions violate employees’ right to engage in “concerted activities for the purpose of collective bargaining.”

In Lewis v. Epic Systems Corp., an employer required its employees to pursue wage and hour claims through individual arbitration and also waive their rights to any collective or class action proceedings. An employee later filed a class action in federal court, alleging that the employer violated the Fair Labor Standards Act (“FLSA”) and Wisconsin law by misclassifying the class members as “exempt” employees and thus depriving them of overtime pay. The trial court denied the employer’s request to compel individual arbitration. On appeal, the Seventh Circuit affirmed the trial court decision, finding the arbitration clause unenforceable because it violated the NLRA by interfering with the employees’ right to collaborate for mutual protection.

The National Labor Relations Board (“NLRB”) maintains that the NLRA prevents agreements that restrict employees from working in concert to resolve disputes and improve the terms and conditions of their employment through mutual aid and protection. Until Epic Systems, courts had not followed the NLRB’s position, instead relying on the Federal Arbitration Act (“FAA”), which permits such arbitration agreements as valid, irrevocable, and enforceable, save upon such grounds as exist at law. In issuing its ruling, the Seventh Circuit in Epic Systems found no conflict between the FAA and NLRA, finding that because the restrictions on collective or class actions are unenforceable under the NLRA, they are unenforceable under the FAA.

The Epic Systems ruling runs contrary to the other federal courts of appeals, making it quite possible that the Supreme Court will step in to resolve the conflict. Until then, class or collective action waivers in pre-dispute arbitration agreements in the Seventh Circuit (Illinois, Wisconsin, and Indiana) are unenforceable and employers should be aware that they cannot rely on such waivers.

Employers should keep in mind that arbitration agreements for employees without class or collective action waivers are still enforceable. While the holding is limited to waivers that require consent as a mandatory term of employment, the NLRB suggests that all class or collective action waivers are unlawful, even when an opt-out is provided.

If you have immediate concerns about how the decision affects your employees, contact Marcus & Boxerman at (312) 216-2720 or

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Illinois and Chicago Employment Law Update: Minimum Wage, Paid Sick Leave and Employee Retirement Accounts

punch-clockThree important employment law changes in the City of Chicago and the State of Illinois may affect your business.

Chicago Minimum Wage Ordinance

On July 1, 2016, the City of Chicago’s minimum wage increased by 50 cents per hour, to $10.50 for non-tipped employees and $5.95 for tipped employees as part of the Chicago minimum wage ordinance approved in late 2014.  The Chicago minimum wage will increase to $13 by 2019.

Employers that either maintain a business facility in the City of Chicago or are subject to at least one Chicago license requirement are bound by the ordinance and must pay all covered employees over the age of 18 the higher minimum wage after the first 90 days of employment.

Employers must post notice of the increase to all employees and must also provide notice of the increase with each employee’s first paycheck received after the effective date of the increase.  The notice can be found here.

Chicago Paid Sick Leave Ordinance

In June, the Chicago City Council passed an ordinance requiring employers to provide paid sick leave.  The ordinance goes into effect July 1, 2017.

Under the ordinance, employees earn 1 hour of sick leave for every 40 hours worked, for a maximum of 40 hours per year.  A total of 20 unused sick hours can roll over into the following year, but there is no payout for unused sick days.  Accrual periods begin after an employee works 80 hours within a 120-day period.  Employees can start using their paid sick leave hours after a 180-day probationary period. Sick leave is available, for example, when an employee or one of his or her family members is ill, injured or receiving medical care, or if the employee is the victim of domestic abuse or sexual violence.

Individuals and business entities with at least one covered employee that maintain a business facility within the City of Chicago or are subject to at least one Chicago license requirement are bound by the sick leave ordinance.  Employers with paid time-off policies that already meet the ordinance’s requirements are exempt from this new ordinance.

Illinois Secure Choice Savings Program

Beginning July 1, 2017, Illinois will implement the Illinois Secure Choice Savings Program.
Under Secure Choice, employees may contribute to a Roth individual retirement plan through paycheck deductions.  Employees are automatically enrolled in Secure Choice but may choose to opt out.  Employers are required to facilitate contributions through the payroll process but are not required to make contributions to accounts or make any investment decisions.

Businesses with at least 25 employees and in operation for at least two years that do not currently offer a retirement plan must participate in the program.  Businesses in operation for less than two years or with fewer than 25 employees may choose to voluntarily participate.  Businesses with existing retirement plans cannot participate.  Employers have nine months from program inception to ensure their employees are enrolled or opted out.

If you have any questions about these changes, please contact Marcus & Boxerman at 312.216.2720 or

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Defend Trade Secrets Act Creates Federal Jurisdiction Over Misappropriation Claims

dtsa-selectedCongress recently passed the Defend Trade Secrets Act (“DTSA”), vesting federal courts with the power to hear trade secret theft disputes and act immediately to resolve them. The DTSA took effect May 12, 2016, and further empowers American innovators to protect their intellectual property from theft.

The DTSA defines “trade secret” as any type of information, regardless of its form and how it is stored, for which the owner has taken “reasonable measures” to maintain its secrecy.  The information must also derive “independent economic value” from it not being generally known and not readily ascertainable through proper means. Examples include customer lists, confidential formulas and manufacturing processes.

Prior to passage of the DTSA, trade secret owners were required to bring an action in state court under individual state trade secret laws or to rely on federal prosecutors to bring criminal charges under the Economic Espionage Act.  Not surprisingly, trade secret protection has suffered from a lack of uniform results nationwide and costly, ineffective enforcement.  The DTSA creates a uniform framework for federal trade secret civil lawsuits. Its provisions are consistent with the protections for other forms of federally-recognized intellectual property, such as patents, trademarks and copyrights. The DTSA does not replace state laws, but rather supplements them with additional rights.

The DTSA allows a trade secret owner to file suit within three years of a misappropriation, and provides reasonable royalties, monetary damages or injunctive relief.  Overall, the DTSA provides trade secret owners more direction in crafting consistent policies to secure their trade secrets. Companies should nonetheless maintain strong security over trade secrets, such as regularly reviewing confidential information to see if any trade secrets exist and reasonably maintaining that information to ensure it stays a secret.  Companies should also develop a response plan for both misappropriations and seizure orders.

If your company has confidentiality agreements with employees, you must provide to them written notice of the DTSA whistleblower protections.  Failure to inform employees will preclude companies from recovering punitive damages or attorneys’ fees in any actions against the employee. For more information about DTSA protections and compliance, contact Marcus & Boxerman at (312) 216-2720 or


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New Federal Overtime Rule Takes Effect December 1, 2016

overtime-selectedThe U.S. Department of Labor recently finalized a rule (the “Final Rule”) to update the federal white collar overtime exemptions.  The Final Rule, which takes effect on December 1, 2016, doubles the salary threshold—from $23,660 to $47,476 per year, or from $455 to $913 a week—under which most salaried workers are guaranteed overtime.  Hourly workers are generally guaranteed overtime pay regardless of their earnings level.  According to the Department of Labor, the Final Rule will make an additional 4.2 million workers eligible for overtime under federal law.

Overtime protections were first put into place by the Fair Labor Standards Act of 1938, and established the general rule that workers be paid time-and-a-half for any hours worked over 40 hours in a week.  In general, all hourly employees are guaranteed overtime, and salaried employees are presumed to have the same guaranteed right to overtime unless they (1) make more than a salary threshold set by the Department of Labor and (2) pass a test demonstrating that they primarily perform executive, administrative, or professional duties (the “Duties Test”).  A limited number of occupations are not eligible for overtime pay (including teachers, doctors, and lawyers) or are subject to special provisions.

The new overtime level will be automatically updated every three years to adjust to wage growth in the country.  Based on Department of Labor projections, the salary threshold is expected to rise to more than $51,000 when the first update occurs on January 1, 2020.

As a bit of good news for employers, the Department of Labor made no changes to the Duties Test concerning the white collar exemption, and the Final Rule permits nondiscretionary bonuses and incentive payments to count toward up to 10 percent of the new salary threshold.  Workers earning more than the salary threshold are still subject to the Duties Test to determine eligibility for overtime.

Employers should review their employment and wage payment practices well in advance of the December 1, 2016 deadline to determine whether any salaried employees may lose their overtime-exempt status.  If this is the case, employers have a number of available options, including (1) increasing an employee’s salary to the new $47,476 level, thereby permitting the employee to retain his or her exempt status, (2) classifying the employee as non-exempt and paying him or her time-and-a-half for all overtime hours worked, (3) prohibiting non-exempt employees from working more than 40 hours in a week or (4) reducing the employee’s salary such that salary plus overtime equals what he or she would have earned before the Final Rule.

For any questions about the New Rule or overtime compensation, please contact us at 312.216.2731 or

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Update: Avoiding The Franchisor Joint Employer Trap

ivak-Bear-Trap-300pxIt’s an unsettling time for franchisors.  The NLRB’s new “indirect control” standard for finding a joint employer relationship (discussed here) is ambiguous and leaves many franchisors confused about how to protect their brand without becoming a joint employer with their franchisees and taking on liability for their employment decisions.  While the law surrounding the joint employer question is still developing, we offer some steps to take to protect yourself from a joint employer finding while maintaining necessary quality controls for your franchise system.

Define the Franchisor/Franchisee Relationship.  Most franchise agreements already explain that a franchisee is an independent contractor, not an employee.  Take it one step further by spelling out that the franchisor has no direct—or indirect—control over franchisee employment decisions.

Do Not Give Franchisees An Employee Handbook.  Do not provide franchisees with a sample employee handbook. Instead, advise franchisees to hire a third-party human resources professional or an attorney to help create an employee handbook and avoid unfair labor practices.

Stay Out of Employment Decisions.  Do not get involved in employment decisions such as hiring, firing, employee discipline, working conditions or wages and benefits.  Also, do not post job listings for franchisee locations or supply job applications to franchisees.

Eliminate Unnecessary Franchisor Controls.  Trim down your franchise operations manuals, training materials and communications, to ensure that you only provide mandates to your franchisees that are necessary to maintain your brand.  Leave the rest to the franchisees.  Do not set hours of operation for a location, work hours for employees or required inventory levels for your franchisees.

Limit Involvement In Franchisee Employee Training.  Make franchisor-provided training optional for franchisee employees below management level.  Franchisees should be solely responsible for training their workforce and must understand that a failure to maintain brand standards will result in a breach of the franchise agreement.  Providing “opening day” training to get a franchisee started is fine, but limit your franchisee training to things directly connected to maintaining your brand standards.

Educate Franchisor Field Personnel.  Make sure your field personnel know the current state of the law and understand what should and should not be communicated to franchisees.  Teach franchisor field personnel only to deal with management-level franchisee employees and to keep far away from franchisee employment decisions.  Also, either update your standards for inspections or consider hiring a third-party to make sure you maintain the appropriate distance.

Make Sure Franchisee Employees Know Who They Work For.  Require your franchisees to explain to their workforce that there is only one boss: the franchisee.  If any franchisee employees come to you with complaints, redirect them to the franchisee for appropriate resolution.

Avoid Monitoring Technology.  Stay away from technology that provides you with too much information about franchisee employees’ daily activities.  While it’s okay for a franchisor to recommend a specific POS system, if the system you recommend comes with software features for employee management, either unbundle that portion of the software or make clear that the use of those software features is optional.

Make Any Centralized Services Optional.  It’s acceptable to offer your franchisees centralized services for things like payroll, administration and accounting, but be sure your franchisees know these centralized services are optional and that they are free to choose a third-party provider of their choice.

Rethink Pricing Controls.  Price is an important part of many brands, but when a franchisor imposes pricing controls on franchisees it affects what the franchisees can afford to pay employees.  When prices are not imperative to your brand, consider letting franchisees control their own price maximums.   Franchisors may still use price-specific, limited-time advertising that affects your system; it’s just smart to leave the franchisee with control as often as possible.

Get an Experienced Attorney.  This area of the law is rapidly changing and an experienced attorney is a valuable tool for navigating it.  An experienced employment attorney can keep you updated on changes in the law and show you how to defend yourself.

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Your Managers May Not Be Exempt Under the DOL’s Proposed Overtime Rules

overtime-clipart-4277100715_cf6ca17eebBusiness owners and franchisees, you might need to start paying your managers overtime.  The Department of Labor (DOL) is updating the overtime rules for the so-called “white collar” exemption that excludes certain executive, administrative, and professional employees from the FLSA requirements for overtime payments.  This exemption is widely used by franchisees, retail stores and quick service restaurants whose managers work far more than 40 hours per week.

Under the current rules, the salary threshold for the white collar overtime exemption is $455 per week or $23,660 per year.  Under the proposed rules, that threshold would rise to $970 per week or $50,440 in 2016, more than doubling the amount an employee has to make before qualifying for the exemption.

If the proposed changes go through, businesses and franchises with managers who make less than $455 per week will have to either have to raise salaries to meet the new threshold requirement or reclassify managers as non-exempt, which means they’ll have to clock in and out like regular employees.  The DOL also plans to update the threshold requirement on an annual basis to account for inflation.  So, you’ll have to revisit the issue yearly unless all of your exempt employees are well over the salary threshold.

In addition to updating the salary requirement, the DOL may alter the “duties test.”  The white collar exemption generally requires than an employee’s duties relate to management or require advanced knowledge.  Currently, the “duties test” does not include a limit on the amount of time an employee may spend on nonexempt duties before losing his exempt status.  The DOL has not proposed any changes yet but plans to consider requests for changes during the comment period for the rules.

The DOL is also accepting input on whether to include a portion of nondiscretionary bonuses and incentive payments that are made at least monthly when calculating an employee’s weekly salary.  Year-end bonuses will not be included.

The new overtime rules are not finalized yet, but they may come into effect sooner than you think.  The DOL recently sent the proposed rules to the Office of Management and Budget (OMB), which has 30-90 days to review the rules.  Then, the rules will be published, and employers will have 60-90 days to comply with the new requirements.  This means business and franchise owners have three to six months to prepare for the coming changes.  So, you should start planning sooner rather than later.

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Avoid Disputes with Business Partners by Planning Ahead

partnership disputes, dispute resolution, business relationshipsWhen partners embark on a new business venture there’s so much excitement about the future that most ignore the unfortunate fact that disputes are virtually inevitable.

Planning for these disputes is the best way to avoid them. We offer the following recommendations to help you avoid partner disputes:

Put Your Agreement in Writing. Whatever entity you choose, a detailed, written agreement—the business version of a prenuptial agreement—is a must. A shareholder agreement (for a corporation), operating agreement (for an LLC) or partnership agreement (for a partnership) details how the business will be managed. Although not all disputes are preventable, written agreements help minimize them by answering many questions that otherwise lead to disagreements. Your agreement should address:

  • Each owner’s equity.
  • Each owner’s role, duties and obligations with respect to the business.
  • Whether one or more owners will be primarily responsible for the day-to-day business operations and decision-making.
  • Expectations for additional capital contributions or loans to the business.
  • Whether any owners are entitled to a salary.
  • How and when profits will be distributed.
  • How to break deadlocks.
  • Whether there are any restrictions on competition with the business.
  • How to handle transfers of ownership interests in the company.
  • What happens in the event of death, incapacity or withdrawal of an owner.
  • What happens upon dissolution of the company.
  • How and where disputes will be resolved.
  • Shareholder agreements, operating agreements and partnership agreements are not one-size-fits-all, so it’s best to have your agreement carefully tailored by an experienced attorney.

Set Clear Expectations for Financial Contributions. Establish clear expectations about how much each owner is expected to contribute and whether contributions—be they cash contributions, equipment to be used in the business or sweat equity—are to be treated as capital contributions or loans. However the contributions are characterized, put it in writing. Document any loans. Also, create rules for future contributions and discuss penalties for a partner’s failure to contribute. These details should be set forth in your agreement.

Define Owners’ Duties. Whether your partners are active or passive, it’s a good idea to have written descriptions for each partner’s duties, as well as the amount of time they are expected to devote to the business to prevent disputes about who’s doing their fair share.

Disclose all Partners in a Franchised Business. If your business is a franchise, be sure to identify all partners on the franchise documents to avoid a default under your franchise agreement and to protect all partners’ rights.

Decide on Compensation and Profit Treatment. Spell out in advance how much money will be paid as salaries or guaranteed payments, how much will be reinvested into the company for expansion or improvements, and how much will be distributed at the end of the year. In addition, agree upfront as to whether distributions will be made to pay owners’ tax bill for company earnings.

Make Company Financial Information Available. Even if the owners don’t have equal control over the company checkbook, it’s important for all of them to have access to company financial information. Many business relationships go sour because of mistrust, but doubts about fairness can be dispelled by giving each owner full access to the company’s financials. Also, be sure to agree in advance on a trusted CPA or accountant to handle bookkeeping and tax matters.

Address Disagreements Directly. If a dispute arises, sit down with your partners to address it. Focus on finding solutions instead of placing blame, and remember that it’s not about winning the argument; it’s about making the best possible choices for your business.

Discuss Worst-Case Scenarios in Advance. Don’t be shy about discussing how things might go wrong. Discussing issues such as what to do if an owner wants to leave the business or isn’t pulling his weight, or how to handle an owner’s death or disability may be uncomfortable at the outset, but talking in advance of a dispute is preferable to fighting it out in court.

Choose the Right Partners. Lastly, remember that friends and family members don’t always make good business partners. It’s important to choose partners whom you trust, who agree with your general vision for the company, who have complementary skill sets and whose strengths make up for your weaknesses.

For more information about building a successful business relationship and how best to avoid disputes, contact us at (312) 216-2720 or

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Limiting Employee Hours to Avoid the Affordable Care Act May Violate ERISA

affordable care act, employment lawUnder the Affordable Care Act (ACA), employers with 50 full-time equivalent employees (those working 30+ hours per week) must offer at least minimal healthcare to employees and their dependents.  Employers, including many franchised businesses, may attempt to avoid this requirement by reducing employee hours and relying more on part-time employees.  While that decision may make economic sense in the short-term, it could lead to an ERISA class action suit.

ERISA prohibits employers from discriminating against employees for exercising their rights under a benefit plan or for the purpose of preventing employees from acquiring those rights.  In a recent New York case, a district court judge refused to dismiss an ERISA class action suit brought by employees whose hours were seemingly cut to avoid healthcare liability under the ACA.

The law in this area is new and is still developing, but franchisees should be careful when making staffing and scheduling changes because courts might look unfavorably on employer staffing decisions made primarily to avoid the ACA.  No matter what changes you’re planning, consider having any discussions regarding staffing decisions with your attorney to make sure you’re protected.

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