Articles Tagged with New Jersey non-compete

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.