Articles Posted in No Compete Agreements

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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.

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Employees are often unable to defend themselves against employers attempting to restrain their post-employment business activities through non-compete agreements.  While employers can sometimes show they have a protectable interest in restraining a former employee’s post-employment business activities, it has become far too common that employers inappropriately use restrictive covenants against former employees who simply cannot afford to defend themselves in an expensive commercial litigation.  These employees are often left with no recourse and have no choice but to cave to their former employer’s unreasonable and anti-competitive demands.

Two recent New Jersey cases provide hope and a roadmap to fight against employers who unfairly attempt to use non-compete agreements to the detriment of the former employee and their ability to make a living.  Both cases illustrate that there are ways to fight back against employers who attempt to use non-compete agreements to restrain competition and retaliate against their former employees.

The first case, Abuaysha v. Shapiro Spa LLC, et al., Docket No.: BER-L-988-18, was brought by our firm, Smith Eibeler on behalf of a terminated employee. This case involves a former massage therapist who filed an emergent Order to Show Cause against her former employer to be relieved of her non-compete agreement after she alleged unlawful termination from her employment.  Specifically, the plaintiff alleged that she was unlawfully fired in retaliation for leaving work and taking leave in order in order to get medical treatment after being told that she may have contracted the shingles virus from a client upon whom she had just performed a massage.  The plaintiff alleged that she told her supervisor that she needed to leave work to get medical treatment to make sure she did not have shingles and that she would not perform any further massages until a doctor cleared her to return to work.  The employer terminated her when she returned to work after a few days of leave.

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A new bill has been introduced to the New Jersey legislature that would invalidate any contract not to compete, not to disclose and/or not to solicit between employers and former employees if it is determined that the employee is eligible for unemployment benefits. The bill [A-3970] if passed, would not apply to any contract not to compete, not to disclose and/or not to solicit, that was in effect prior to when the bill is enacted.

The current law in New Jersey allows employers to enforce an agreement not to compete, not to disclose and/or not to solicit if the agreement protects a legitimate interest of the employer. Courts have held that, in certain circumstances, employers have a legitimate interest in protecting things such as trade secrets, confidential business information and customer relationships. In order to enforce a restrictive covenant, the terms of the not to compete, not to disclose and/or not to solicit clause must be reasonable, not impose an undue hardship on the employee and not be injurious to the public. Courts will not enforce agreements not to compete, not to disclose and/or not to solicit if the restriction is unreasonable. New Jersey courts have repeatedly held that employers do not have a legitimate interest in restricting competition. This is because New Jersey has a strong public policy affording individuals the right to pursue one’s profession and livelihood. When determining whether a restrictive covenant is enforceable, New Jersey courts will analyze the specific facts and circumstances of the employee’s former employment and new employment, along with the specific terms of the restrictive covenant.

If A-3970 becomes law, an employee would be relieved from any contractual obligation not to compete, not to disclose and/or not to solicit if they are found to be eligible for unemployment benefits. An employee is eligible for unemployment benefits if they become unemployed due to not fault of their own. Most disqualifications for unemployment benefits are because the employee either left work voluntarily without good cause attributable to the work or was involuntarily terminated for committing an act of misconduct. The three types of misconduct are gross misconduct, simple misconduct and severe misconduct. Gross misconduct is when an employee is terminated because they committed a crime of the first, second, third or fourth degree under the New Jersey Code of Criminal Justice. Simple misconduct occurs when an employee is terminated because of improper, intentional, connected with one’s work, malicious and within the applicant’s control and is either a deliberate violation of his or her employer’s rules or a disregard to standards of behavior that the employer has the right to expect of the applicant. There currently is no statutory definition for severe misconduct, but there is a bill pending to correct this oversight by the legislature. The Appellate Division has interpreted severe misconduct to be a gap-filler between simple misconduct and gross misconduct.