As we approach the new year and reflect on the radical changes occurring over the last 18 months, recruiting top talent and retaining key employees remains a significant challenge for many businesses. For that reason, many business owners are exploring additional tools and options to attract new talent and keep key employees.
One of these tools is a phantom equity plan. A phantom equity plan offers a business significant flexibility while at the same time giving an employee something of value that is intrinsically tied to the growth of the business. Phantom equity plans provide an employee some, but not all, of the benefits of being an equity holder without the complexity, additional documentation, and voting rights typically associated with equity ownership. These benefits may include: (1) receiving distributions or dividends when such benefits are paid to equity holders, (2) payments upon a sale of the company, or (3) payments upon retirement or separation of employment.
In exchange for providing an employee these added benefits, businesses realize several advantages. First, an employee feels rewarded when they are offered phantom equity, while at the same time creatively aligning an employee’s financial goals with the business’s success. Second, the terms of a phantom equity plan can be carefully crafted to ensure an employee continues working for a business before earning any financial benefit from a phantom equity plan. Finally, businesses can require that an employee execute updated non-compete and non-solicitation covenants that will be more defensible because the employee is receiving a significant added value (e.g., potential payments under the phantom equity plan) in exchange for signing the restrictive covenants.
While these programs are “simpler” by nature, businesses must still prepare these plans and administer them in compliance with the IRS code and other applicable statutes and regulations. The attorneys at Levin Ginsburg can help design, implement, and prepare a phantom equity plan that is a good fit for your business to allow you to recruit top talent and retain key employees. For additional help navigating these issues, feel free to contact Walker R. Lawrence, a partner in the employment law practice at Levin Ginsburg, at email@example.com, or (312) 368-0110.
Levin Ginsburg previously updated our clients on the proposed changes to Illinois non-compete and non-solicitation law (See March 30, 2021 blog here). That legislation passed on May 31, 2021, was signed into law August 13, 2021, and takes effect January 1, 2022. The new law is not retroactive, so it will not impact any agreement entered into before the new year.
Employers must understand this new law and how it will impact their restrictive covenant agreements with employees. The key requirements are as follows:
- Employers may not enter into non-compete agreements with any employee earning $75,000 or less per year. This salary threshold is scheduled to increase by $5,000 every 5 years through 2037.
- Employers may not enter into non-solicitation agreements with any employee earning $45,000 or less per year. This salary threshold is scheduled to increase by $2,500 every 5 years through 2037.
- Every restrictive covenant must include a notice for the employee to consult with counsel, which must be given to an employee 14-days before the restrictive covenant is executed.
- The new law codifies legal precedent that requires an employee to work at least 2 years before continued employment would be considered sufficient consideration for the agreement. As a result, employers will be required to provide some professional or financial benefit in exchange for signing any agreement in order for the agreement to be deemed enforceable at the time of execution.
- A restrictive covenant will be unenforceable if the employee was terminated or furloughed due to the COVID-19 pandemic or under similar circumstances (yet to be defined).
- The law does not allow a court to entirely rewrite a restrictive covenant, but gives the court broad discretion to modify or delete provisions of a covenant rather than hold the entire covenant unenforceable.
- Finally, the new law will require employers to pay an employee’s attorneys’ fees if the restrictive covenant is deemed unenforceable.
These changes will have a significant impact on an employer’s decision to require its employees to sign non-compete and non-solicitation agreements. Employers should begin working with their employment counsel now — well before the new law’s effective date of January 1, 2022 — to ensure their agreements are enforceable and avoid the risk of litigation and liability for an employee’s attorneys’ fees.
For assistance in drafting enforceable restrictive covenants and protecting your business, reach out to Walker R. Lawrence (firstname.lastname@example.org), a partner in Levin Ginsburg’s employment law practice, or Joseph A. LaPlaca (email@example.com), an associate attorney at Levin Ginsburg.