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Proposed Legislation Would Restrict the Enforceability of Non-Compete Agreements for New Jersey Employees

A new legislative bill has been introduced that would dramatically change New Jersey state law concerning restrictive covenants and non-compete agreements. Bill A1769 is intended to protect New Jersey employees in securing new employment while also taking into consideration the legitimate protectable interests some employers have in restraining certain employees’ post-termination business activities. Whether a restrictive covenant is enforceable will remain a fact-sensitive inquiry, the bill, if passed, will provide both the employee and the employer with a defined set of rules in determining whether a restrictive covenant can be enforced against a former employee.

A restrictive covenant is an agreement between an employee and their employer that restricts an employee’s ability to secure new employment after the employment has ended.  A non-compete clause is a common form of restrictive covenant that seeks to prohibit an employee from working for a competing business for a certain period of time after they are separated from their employment. Another common form of a restrictive covenant is a non-solicitation clause that prohibits a former employee from soliciting business from a former client or customer on behalf of another business.  Restrictive covenants are common for sale representatives, insurance and financial professionals, and other high-income professionals.

In introducing this new bill, the New Jersey legislature has declared that these types of post-employment contracts restrict, prohibit, and impede the development of business in New Jersey because they force skilled workers to find work outside of New Jersey while also requiring businesses to solicit skilled workers from other states to perform work in New Jersey.  For these reasons, the drafters of this bill state that restrictive covenants discourage innovation and production, impose special hardships on employees and may constitute a restraint on trade and commerce.

In an attempt to preserve employment opportunities for New Jersey employees, Bill A1769 limits the enforceability of restrictive covenants by restricting their application to specific employees and by providing for specific requirements that must be contained in the restrictive covenant agreement. Certain classifications of employees that an employer can no longer enforce a restrictive covenant upon include: (1) employees who are classified as nonexempt under the Fair Labor Standards Act; (2) students in undergraduate or graduate schools that undertake an internship or enter into short-term employment; (3) those participating in an apprenticeship program registered by the Office of Apprenticeship of the U.S. Department of Labor; (4) seasonal or temporary employees;  (5) employees that have been laid off or terminated without a determination of misconduct or laid off by action of the employer; (6) independent contractors; (7)  employees under the age of 18; (8) low-wage employees; and (9) employees who have been employed by the employer for less than one year.

After the employment relationship has ended and a non-compete agreement has become effective, an employer must pay the employee their regular compensation and benefits for any period of time that they are restrained from working because of the non-compete.  However, this provision does not apply to employees who have been terminated for misconduct.  The definition of misconduct, which is substantially similar to its use in the context of unemployment insurance benefits, is “conduct that is improper, intentional, connected with the individual’s work, within the individual’s control, not a good faith error of judgment or discretion, and is either a deliberate refusal, without good cause, to comply with the employer’s lawful and reasonable rules made known to the employee or a deliberate disregard of standards of behavior the employer has a reasonable right to expect, including reasonable safety standards and reasonable standards for a workplace free of drug and substance.”  The inclusion of this provision in the bill would seem to make determinations of unemployment insurance benefits much more important especially if an unemployment determination can be used to determine the enforceability of a non-compete under this proposed statute.

The bill also requires that the restrictive covenant satisfy ten different requirements that include that the agreement:

(1) be provided in writing 30 days before the employee’s start date and signed by both the employer and employee. If the agreement is entered into after the start of employment, the agreement must be provided at least 30 business days before it becomes effective;

(2) protect the employer’s legitimate business interests;

(3) restrict the employee’s activities for a maximum of 12 months after the termination.

(4) be reasonable regarding geographical restraints;

(5) that there is a reasonable relation between the activities prohibited and the activities the employee performed during employment;

(6) not penalize an employee for challenging the validity of the covenant;

(7) not contain a choice of law provision;

(8) not require the employee to waive any of his or her substantive, procedural and remedial rights;

(9) not restrict an employee from providing services to a customer or client of the employer if the employee did not solicit the customer or client;

(10) not be burdensome on the employee, injurious to the public, or inconsistent with public policy.

The bill also requires that the employer notify the employee of their intent to enforce the covenant in writing within ten days of the employee’s termination. If the employer fails to follow this procedure, the agreement becomes null and void. Employers must also post information about this statute and its requirements in a prominent space within the workplace.

The bill also seeks to address the inherent inequities in disputes concerning the enforceability of restrictive covenants by providing employees the right of a private action against employers who unfairly seek to use restrictive covenants against employees.  As set forth in the bill, should the employee feel that their employer has violated the requirements under the bill to restraint their ability to secure new employment, an employee may bring a civil action for appropriate relief, which includes enjoining the conduct of any person or employer, awarding lost compensation, damages, liquidated damages and reasonable attorneys fees and cost.  The employee has two years to bring a civil action and this two-year window can begin with the employee’s termination, the date of the attempted enforcement of the restrictive covenant, the date when the covenant was signed, or the time when the employee first learns of the prohibited agreement.  Providing an aggrieved employee the ability to bring a private cause of action, with meaningful penalties against employers who violate the statute, will ensure a more level playing field for adjudication of disputes concerning the enforceability of restrictive covenants.

New Jersey’s law concerning restrictive covenants has been in need of reform for a long time.  If passed, this bill will provide some necessary protections for employees who cannot afford the substantial expense of litigation from a former employer who all too often can simply out spend the employee in restrictive covenant litigation. The bill will also encourage the development of business in the State by helping to retain workers and promote innovation through constraining the application of restrictive covenants. Our New Jersey employment lawyers will keep a close eye on the development of this bill and any other reforms concerning New Jersey restrictive covenant law.