Blue Christmas for Garden State Employers if NJ Passes Proposed Legislation Imposing Very Strict Limits on Non-Competes

December 20, 2018 | By Colleen O’Donnell

With end of year bonuses just around the corner, ‘tis the season for employers to review the non-competition agreements and other restrictive covenants that limit what their employees can do after leaving employment.  For instance: if Santa’s head elf has been holding on until end of year to get that bonus check, January is the perfect time to ditch the North Pole for a VP position at Mattel.  Can Santa prevent his trusted advisor from working for the competition?  If Santa and his elves were operating in New Jersey, a new law may make it more difficult for Santa to limit his former employee’s activities after leaving the workshop.

Currently, New Jersey law allows non-compete agreements, as long as they reasonably balance the employer’s legitimate interests with undue hardship on the employee.  For a non-compete agreement to be enforceable, New Jersey courts generally require that the agreement (1) protect the legitimate interests of the employer; (2) does not impose an undue hardship on the employee; and (3) is not injurious to the public.

In late 2017, and again in January 2018, the New Jersey Senate and Assembly proposed two companion bills, S2872 and A1769, which would significantly restrict the enforceability of restrictive covenants.  For example, each version of the bill establishes a 10-part test that a restrictive covenant would have to meet in order to be enforceable:

  1. If the restrictive covenant is part of an initial employment contract, the employer must disclose its terms to the employee in writing, and if after employment commences, the agreement is not enforceable for 30 days after signing.
  2. Restrictive covenants are limited to protection of “the legitimate business interests of the employer” which include the employer’s trade secrets and confidential information.
  3. The duration of non-compete provisions cannot exceed 12 months.
  4. The “geographical reach” must be reasonable, may cover only those areas where the employee actually worked, or “had a material presence or influence,” during a two-year period before termination and cannot prohibit the employee from seeking employment in other states.
  5. Prohibited activities may include only “the specific types of services provided by the employee” during that two-year period.
  6. The employer cannot retaliate against an employee for opposing the “validity or enforceability” of a restrictive covenant.
  7. “Choice of law” provisions cannot avoid the bill’s requirements.
  8. Employees’ rights under this bill are not subject to waiver.
  9. Former employees may provide services to a customer of the employer if the former employee did not “initiate or solicit” them.
  10. The restrictive covenant cannot be “unduly burdensome” to the employee, nor may it harm the public or go against public policy.

Each bill further states that restrictive covenants would not be enforceable under any circumstances for nine (9) categories of employees, including but not limited to employees who are considered “nonexempt” from overtime pay under the federal Fair Labor Standards Act (“FLSA”) (which would include all hourly employees), employees who were laid off or terminated without a determination of misconduct, employees under the age of 18, and seasonal or temporary employees.

As currently drafted, the new law would also require that, 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 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.”

Employers would have to notify former employees that they intend to enforce a restrictive covenant within 10 days of termination, in addition to posting a copy of the law in a prominent place in the work area.  Under the current proposed language, employees have a private right of action against employers who seek to enforce an agreement in violation of the law within 2 years, and liquidated damages in a civil lawsuit by a former employee could range as high as $10,000.

While this new law would not prevent New Jersey employers from utilizing non-compete agreements and other restrictive covenants to protect their legitimate business interests, it would add a series of hurdles for employers to clear before being able to enforce these agreements.

There are currently several employment-related bills in various stages of development in the New Jersey legislative, and it is unclear when or if these bills could advance to Governor Murphy’s desk for enactment.  Stay tuned to HR Legalist for further updates regarding these proposals.  In the meantime, employers with questions about the enforceability of their restrictive covenants, or seeking assistance with preparing employment agreements, should consult with experience in this area of the law.

The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.