New Non-Compete Laws Have Little Impact on CPA Firms

In July, President Biden signed an executive order that made it more difficult for non-compete agreements, in general, to be enforceable. In Illinois, a more restrictive version of this change is ahead of the curve, making it more challenging for Illinois employers to enter into non-compete and non-solicitation agreements with employees. I have heard that New York and perhaps other states have done the same.

For CPA firms, it’s much ado about nothing. I’ll explain why in a moment.

Non-compete vs. non-solicitation agreements

Let’s understand the difference between these two terms that are often incorrectly used synonymously. A non-compete generally bans a departed employee from working within a specified geographic radius of the former employer or working for a specific competitor. Non-compete agreements are very rare with typical, local CPA firms and likely unenforceable.

A non-solicitation agreement prohibits a departed employee from taking clients and staff with them to their new employer. This agreement applies regardless of whether the employee solicits the clients and staff or not. Non-solicitation agreements are extremely common at CPA firms of all sizes and are enforceable in most states.

Why CPA firms have a valid case for enforcing non-solicitation agreements

CPA firms invest a significant amount of money in (1) acquiring and retaining clients and (2) recruiting, developing and retaining staff. This proprietary know-how includes marketing research and methods, management strategies, client service practices, techniques in performing client work, community exposure, use of technology and extensive training of personnel. It’s patently unfair and unscrupulous for partners or staff to leave their firm and abscond with clients and staff. At a minimum, if someone does violate the non-solicitation agreement, they should be required to pay (called liquidated damages) the firm for these valuable assets taken without the firm’s consent. Every CPA firm should require partners and staff to sign non-solicitation agreements.

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The trigger to this new wave of legislation

At the beginning of this blog, I wrote that this new legislation is much ado about nothing.  According to an article written by Elyssa Cherney of Crains, (speaking about the Illinois law) “this new law was prompted by a Jimmy John’s policy that barred employees from getting hired by rival sandwich shops”. So, it would appear that the intent of the new law is to protect low-income (mostly unskilled) workers from non-compete agreements that stifle their earning potential. There does not appear to be an intent to prevent CPA firms from enforcing properly written non-solicitation agreements that provide for fair and reasonable terms.

What CPA firms should do

1. Unless absolutely necessary, refrain from non-compete.
2. The fine print of the Illinois law is that to maximize the enforceability of non-solicitation agreements, the staff person must receive adequate consideration. In the case of staff who work for a firm for at least two years after signing the agreement, the act of providing the person with normal compensation is adequate consideration.  In the case of staff work who have worked for less than two years from signing the agreement, additional consideration may be necessary such as providing CPE, on-the-job training, mentoring and supervision, all things that CPA firms routinely furnish.
3. To maximize enforceability, the firm should do two things: (a) advise staff in writing to consult with an attorney before signing the agreement and (b) provide each staff person with a copy of the agreement at least 14 days before employment begins.  As a practical matter, the advice to consult with an attorney is problematic: many attorneys, if retained by a staff person, may advise their clients not to sign the agreement, thus causing obvious difficulties for the firm.  Firms are advised to consult their own attorneys for guidance on this.