New Jersey Bill Seeks to Restrict Use of Non-Compete Agreements

Proposed Senate Bill 3518 Seeks To Limit New Jersey Non-Compete Agreements

Proposed legislation in New Jersey seeks to limit the use of non-compete agreements. Under Senate Bill 3518, all restrictive covenants between employers and employees would have to meet a stringent 10-part test in order to be enforceable.

Growing Hostility Towards Non-Competes

A non-compete is a contract in which an employee promises not to take a job with a competitor for a certain period of time after the employment relationship ends. The goal is to protect confidential company information and to prevent the diversion of valuable clients to a competitor.

Because this involves a restraint of trade that restricts the rights of those with less bargaining power to pursue employment opportunities, courts closely scrutinize non-competition agreements for fairness and reasonableness. Last year, the Obama Administration issued a report regarding the potential misuse of non-competition agreements. The report, entitled “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses,” found that nearly one-fifth of U.S. workers (30 million) are subject to non-competes. It concluded that “in certain cases, non-competes can reduce the welfare of workers and hamper the efficiency of the economy as a whole by depressing wages, limiting mobility, and inhibiting innovation.”

State regulations and court decisions regarding non-competes vary widely. Under current New Jersey employment law, enforceable non-compete agreements must strike a balance between protecting the employer’s legitimate business interests with the employee’s right to work in a field for which he or she is trained. In general, courts balance these considerations by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.

Requirements for Restrictive Covenants Under Senate Bill 3518

SB 3518 would formalize and increase restrictions on the use of restrictive covenants by employers. Under the bill, restrictive covenants are defined as “agreements between employers and employees or anticipated employees under which the employee or anticipated employee agrees not to engage in certain specified activities competitive with the employer after the employment relationship has ended.”

To be enforceable, a restrictive covenant would be required to meet the following requirements:

• If the agreement is entered into in connection with the commencement of employment, the employer must disclose the terms of the agreement in writing to the prospective employee. The agreement must be signed by the employer and the employee and expressly state that the employee has the right to consult with counsel prior to signing. 
• The agreement may not be broader than necessary to protect the legitimate business interests of the employer, including the employer’s trade secrets or other confidential information that would not otherwise qualify as a trade secret.
• The agreement may restrict the employee’s engaging in activities competitive with the employee’s former employer for a period not to exceed 12 months following the date of termination of employment.
• The agreement must be reasonable in geographical reach and limited to the geographic areas in which the employee provided services or had a material presence or influence during the two years preceding the date of termination of employment, and may not prohibit an employee from seeking employment in other states.
• The agreement must be reasonable in the scope of proscribed activities in relation to the interests protected and limited to only the specific types of services provided by the employee at any time during the last two years of employment.
• The agreement must not penalize an employee for defending against or challenging the validity or enforceability of the covenant. 
• The agreement must not contain a choice of law provision that would have the effect of avoiding the requirements of the bill, if the employee is a resident of or employed in the State at the time of termination of employment and has been for at least 30 days immediately preceding the employee’s termination of employment. 
• The agreement must not waive an employee’s substantive, procedural and remedial rights provided under the bill, any other act or administrative regulation, or under the common law.
• The agreement must not restrict an employee from providing a service to a customer or client of the employer if the employee does not initiate or solicit the customer or client.
• The agreement may not be unduly burdensome on the employee, injurious to the public, or inconsistent with public policy.    

Many of these requirements are consistent with current case law in New Jersey. The proposed legislation takes this many steps farther as restrictive covenants would not enforceable at all against certain employees, including: an employee who is classified as nonexempt under the Fair Labor Standards Act; an undergraduate or graduate student that undertakes an internship or otherwise enters into a short-term employment relationship with an employer; an apprentice participating in an apprenticeship program registered by the Office of Apprenticeship of the U.S. Department of Labor and meeting the standards established by the office, or registered by a State apprenticeship agency recognized by the office; a seasonal or temporary employee; an employee that has been terminated without good cause or laid off by action of the employer; an independent contractor; an employee under the age of 18; a low-wage employee; or an employee whose period of service to an employer is less than one year.

The bill also imposes due process requirements so that, not later than 10 days after the termination of the employment relationship, the employer must notify the employee in writing of its intent to enforce the non-compete.  If the employer fails to provide notice, the agreement would be void and unenforceable. Notably, this requirement would not apply if the employee has been terminated for good cause. The issue of whether the termination was just or not will inevitably become an enhanced employment law battleground as a result of this proviso.

The bill would also make it far more costly to enforce any non-compete in the absence of termination for good cause. During any period after the employment relationship has ended and a covenant is effective, the employer would have to pay the employee an amount equal to 100 percent of the pay which the employee would have been entitled to work that would have been performed during the period, and continue to make whatever benefit contributions would be required in order to maintain the fringe benefits to which the employee would have been entitled to work that would have been performed, such as vacation pay. Once again, these requirements would not apply if the employee breached the agreement or has been terminated for good cause.

Finally, SB 3518 establishes a private cause of action. An employee subject to a restrictive covenant may bring a civil action against any employer or person alleged to have violated the law. An employee must bring the action within two years of the later of when a prohibited agreement was signed; when the employee learns of the prohibited agreement; when the employment relationship is terminated; or when the employer takes any step to enforce the agreement.

What’s Next?

While the proposed bill establishes very clear guidelines for the enforcement of non-competes agreements, the equities need more balance as it would be more difficult for employers to protect their proprietary business data and to prevent former workers from engaging in unfair competition. SB 3518 is currently pending before the New Jersey Senate Labor Committee. We will continue to track its status and provide updates.

Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Gary Young, at 201-806-3364.