Earlier this month, the New Jersey Assembly’s Labor Committee passed bill A3715, designed to sharply limit the availability, use, and enforceability of restrictive covenants such as non-compete agreements by New Jersey employers. The stated purpose of the bill is to preclude the use of certain post-employment restraints of covenants with certain groups of employees including low-wage workers, students, employees under 18 years old, and seasonal and temp workers. The bill would also preclude the use of restrictive covenants with independent contractors. This new bill is similar in many ways to bills that have been proposed in various state legislatures recently and enacted into law in states such as Massachusetts, Illinois and Washington.
Bill A3715 seeks to codify certain common law restrictions on the use of non-compete agreements including those regarding the scope of a non-compete, which require that a non-compete be no broader than necessary to protect the employer’s legitimate business interests. The bill also seeks to introduce new obligations and restrictions including a notice requirement, duration limitations, geographic limitations, garden leave requirement, and choice of law restrictions. Additionally, the bill would eliminate the “blue pencil” doctrine, by precluding a court from judicially modifying or revising an overbroad or impractical restrictive covenant so that it is judicially enforceable while still reflective of the parties’ intent.
If enacted, employers would be required to provide employees with at least 30 business days’ notice of the terms of the non-compete either before the employment begins or the non-compete becomes effective. Additionally, an employer must provide a post-employment notice to employees within 10 days from the termination of employment stating whether the employer intends to enforce its restrictive covenants.
The bill would limit the duration of such restrictive covenants to 12 months from the termination of employment. It would also prevent employers from enforcing covenants not to compete against former employees who simply leave the state of New Jersey, which could severely limit the effectiveness of such restrictions given the state’s relatively small size and proximity to populous neighboring states such as New York. Additionally, the geographic scope of non-competes would be limited to the geographic area in which the employee worked or had a material presence during the two years preceding termination of the employment.
Under the bill, a non-compete would not be enforceable until an employee has worked for the employer for at least a year. Another notable requirement under the bill is mandatory “garden leave” which requires an employer to pay the employee during the operative period of post-employment restriction at a rate equal to 100% of the employee’s rate of compensation, plus the employer must continue to make whatever benefit contributions would be required in order to maintain the fringe benefits to which the employee would have been entitled for work that would have been performed during the restrictive period. Notably, the requirement to pay garden leave would apply even if the employee resigns or obtains new employment. However, the employer is relieved of paying garden leave if the employee was fired for misconduct.
Finally, the New Jersey bill declares no-poach agreements to be against public policy and void. The bill defines no-poach agreements as an agreement that restricts or hinders the ability of an employer to contract for the services of a low-wage employee. As we have previously discussed, such no-poach agreements could also draw the attention of the Department of Justice which has been combatting such agreements between competitors by arguing that they violate federal antitrust laws.
The bill has a long way to go to be enacted. It is unclear whether it eventually will become law and if it does what its final form will be. Nonetheless, it is important for New Jersey employers to be aware of the potential changes to non-compete law and to stay abreast of developments to avoid unnecessary and potentially expensive litigation over compliance or enforceability.
Whether you are an employee being asked to sign a non-compete agreement or an employer needing a non-compete agreement or needing to see if your existing agreement is still valid, it is important to speak with an experienced restrictive covenant and non-compete agreement law attorney. It is no less important to have a skilled non-compete attorney at your side if you find yourself embroiled in litigation over the enforcement of a covenant not to compete, non-solicitation agreement, or nondisclosure agreement.
Continue Reading New Jersey Considering Major Changes to Non-Compete Law