Are Certain Non-Compete Agreements on the Way Out in New Jersey?

Non-compete agreements, also known as restrictive covenants, are employment contracts designed to limit the ability of an employee to compete with the employer by its stealing customers or trade secrets. Although somewhat controversial and frowned upon as being “restraints on trade,” most states permit such agreements (California is a notable exception).

Under current New Jersey 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.

Legislation to outlaw certain types of non-compete agreements is currently pending in the New Jersey Assembly. The bill (A-3970), introduced on April 4, 2013, specifically applies to unemployment compensation.

The proposed NJ non-compete legislation would specifically invalidate any covenant, contract, or agreement not to compete, not to disclose, or not to solicit, entered into by an individual with the individual’s most recent employer, if the individual is found to be eligible for unemployment insurance benefits pursuant to New Jersey’s unemployment compensation law (N.J.S.A.43:21-1 et seq.)  What is surprising is that non-solicitation and confidentiality restrictions are universally recognized as protecting the legitimate interests of employers.

Being eligible for unemployment benefits as a qualification is not exactly a “high bar” as New Jersey is considered one of the most liberal, give-away states when it comes to unemployment eligibility determinations.  The bill does stipulate that the provisions of the bill will not apply to any covenant, contract, or agreement in effect on or before the date of the bill’s enactment.  This will have only a limited duration as a qualification, however.

Although it is unclear if this legislation will advance, it appears to have some support in both the Assembly and the Senate. Therefore, New Jersey companies should keep it on their radar. Since the bill would not apply retroactively, it may be necessary to execute agreements in advance of the law’s effective date.  Even better, employers should contact their legislative representatives and let them know that they oppose this change.

If you have any questions about the proposed legislation or how it may impact your operations, please contact me, Gary Young, or the Scarinci Hollenbeck attorney with whom you work.