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Articles Posted in No Compete Agreements

A proposed bill that would significantly limit New Jersey employers’ ability to prevent their employees from working with competing businesses will be considered by the New Jersey Assembly Labor Committee.  Proponents of the bill argue the new statutory framework will encourage innovation and production by eliminating the special hardships that non-compete agreements impose on New Jersey employees. This legislation, if passed, would be a gigantic victory for New Jersey employees whose pursuit of job and career opportunities have been stifled for far too long by employers’ restrictive covenants.

692696DC-BF0E-4D5C-B804-7228BA4B9D50-300x300While non-compete agreements are disfavored by our Courts, current New Jersey law allows employers to require employees to execute these anti-competitive contracts as a condition of employment regardless of the agreement’s ultimate enforceability. Job applicants who choose not to execute a non-compete agreement can lawfully be denied employment, and if an employee is fired for refusing to sign during the course of his or her employment, there is no recourse for wrongful termination.

Because litigation involving an alleged breach of a non-competition agreement is fact sensitive to the particulars of each case, it is often very difficult for an employee (or his or her employment attorney) to accurately predict whether a court will enforce a contested non-compete agreement. To make matters even worse for employees, most non-compete disputes will never get to the point of a judicial determination because of the high cost inherent in restrictive covenant litigation and the significant financial disparities that so often exist between the individual employee and entity employer.  The reality is that most working people simply cannot afford to pay a competent non-compete attorney to represent them.  Because of this reality, employees who have been subjected to overly broad, anti-competition restrictive covenants, have no recourse and are left with the choice of either remaining in a job they would like to leave or leaving the job only to be forced out of their chosen industry for the period of time (e.g. 1 to 2 years) required under the non-competition clause.

The New Jersey Appellate Division issued an opinion last month that has provided additional clarity to what limitations a company may permissibly impose on its employees pursuant to non-competition clauses with restrictive covenant agreements. The court’s opinion (delivered in an action involving six consolidated appeals) reaffirmed the long-standing principle that employers can impose certain provisions commonly found in restrictive covenant agreements in the interest of fair competition; however, the court also held that certain other common provisions should be struck from restrictive covenant agreements as the court found them to be unduly harmful to employees.

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In ADP, LLC v. Kusins, the court reviewed the restrictive covenant agreements signed by six individual employees of the human resources management software company ADP. The agreements stipulated (in pertinent part) that upon leaving the company, the employees could not compete with ADP by soliciting the ADP clients or potential clients with whom those employees had a previous business relationship with, or whose information they became aware of during their tenure at ADP. This restriction was only applicable within the geographic area specified by the restrictive covenant agreement. This type of restriction, while seemingly onerous, has unfortunately become commonplace in our society. Despite employment attorneys making arguments to the contrary, courts have routinely upheld these types of restrictions on the basis that they do not cause undue harm to the employees. Through the recent opinion in Kusins, the Appellate Division has taken the opposite view and found that these restrictions are too great.

In their opinion, the Appellate Division identified two distinct restrictive covenant agreements signed by the six employees. The first contained traditional provisions, which the court found to be non-controversial and enforceable. In so holding, the court reaffirmed the general vitality of restrictive covenant agreements in New Jersey – coming as little surprise. The second restrictive covenant agreements signed by the employees was the main point of contention. These restrictive covenant agreements were signed via a “clickwrap” agreement by the employees and were provided only to those employees recognized as “top performers.” In exchange for signing these restrictive covenant agreements, the employees would be entitled to stock option rewards. The court acknowledged that ADP had a legitimate need to impose these additional restrictive covenant agreements on their top performers, because those employees had heightened ability to harm ADP through competition, due to their proven capacity in this industry. Nonetheless, the court soundly rejected the provisions as they were written and “blue-penciled” or edited the restrictive covenant agreements to lessen the restrictions, remove the undue harm to the employees, and render the restrictive covenant agreements enforceable.

New Jersey employees of four different fast-food chains won a significant victory last month when it was announced that they would no longer use or enforce “no-poach” contracts or agreements to restrict their employees.  The chains – Dunkin’, Five Guys, Arby’s, and Little Caesar’s – came to formal agreements with the State of New Jersey to end the practice.  These agreements were made in the wake of an investigation into the practice, launched by the Attorneys General of 13 states, including New Jersey. New Jersey’s Attorney General Gurbir Grewal released a statement regarding the agreements, saying “I am glad that Arby’s, Little Caesar, Five Guys and Dunkin’ now recognize the unfairness of no-poach agreements and will stop using them, and I am proud of the multistate investigation that led to their change of heart.”

The particular agreements at issue here restricted fast-food employees from leaving their employment to work for a different franchise of the same fast-food company.  For example, a cashier at a Dunkin’ in New Brunswick would be restricted from working as a cashier at a Dunkin’ in Trenton.  Upon applying to the Trenton location, the prospective employee would disclose their previous employment at the New Brunswick location, causing the Trenton location to deny the employee’s application.  This can be particularly harmful when, for example, the New Brunswick cashier applies for a vacant store manager position at the Trenton location because there was no managerial position open at the New Brunswick location.  In this case, the no-poach agreement doesn’t just stifle competition, it harms the individual employee by denying them an opportunity to advance their career and increase their earning potential.

The rationale supporting these agreements, ostensibly, is a need to protect the resources expended on training the departing employee.  Without these agreements, the fast-food companies argue, franchisors would be damaged as they would not be able to recoup the investment they made in the employee.  Additionally (though this is not one of their stated rationales) these agreements provide substantial benefit to franchisors by reducing wages and depressing wage growth. By outlawing an employee from working for another franchisor, the franchisor in question insulates themselves from competing with that franchisor.  There is no concern that an employee will go to the competitor for better pay, so there is no incentive to offer better pay.  This is an insidious result of no-poach agreements, and one of the main reasons they have come under so much scrutiny in recent years.  This is closely related to the concern that no-poach agreements may also run afoul of Federal anti-trust law, as the franchisors could be viewed as colluding to fix wages.

New Jersey is taking a stand against the unreasonable of non-compete agreements and other restrictive covenants in the fast food industry. New Jersey has joined a group of states leading an investigative charge against several corporations in the fast food industry for the utilization of no-poach and non-compete agreements. While non-compete agreements are common in a wide variety of industries in which the companies could show they have a protectable interest in restricting an important and/or high wage earner, this is rarely this case in the fast food industry. Because of this, the New Jersey Attorney General has decided to address the issue.

Non-compete agreements are a type of restrictive covenant where an employer restricts an employee from working in a particular industry for a definite period of time after the separation of their employment. Non-compete agreements often seek to restrain employees from working for specific competitive companies, while others prohibit the employee from working in the entire industry for a particular period of time. When these agreements are in place, they leave employees with only two options: attempt to move up the ranks of their own individual franchise location or find work in a different industry. Plaintiff-side employment lawyers often argue that non-competes damage labor competition within particular industries, suppress wages, restrict an employee’s earning potential and cause damage to a state’s economy. Defense-side employment lawyers argue that their employer clients extend substantial resources in employees that is worthy of protection for a period of time.

The corporations involved in the New Jersey investigation include Burger King, Dunkin’ Donuts, Five Guys Burgers and Fries, Little Caesars, Wendy’s, Arby’s, Popeye’s Louisiana Chicken and Panera Bread. The large size corporations allow them to nearly dominate the fast food industry, which heightens the impact that the non-compete agreements have on fast food employees. Fast food employees are particularly at risk of being damaged by restrictive covenants because of the trend of low wages and a common lack of resources available to them. These employees usually lack high levels of education and can be desperate for work. They typically do not have access to attorneys who can review their employment agreements or explain their protected rights. Because of this, New Jersey along with other states are attempting to address the harmful policies in order to protect the rights of vulnerable individuals.

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 sales 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.

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.

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.

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