By:  Ty Hyderally, Esq., Francine Foner, Esq., and Tom Daly.

The New Jersey State Assembly is considering a bill that would significantly limit the enforcement non-compete agreements in New Jersey. Introduced on May 2, 2022, the bill was approved by the Assembly Labor Committee on a 6-3 vote, and has since been with the Assembly Oversight, Reform and Federal Regulations Committee. Currently, there is no New Jersey statute governing non-competes in employment. If enacted, the new law would codify some of New Jersey’s existing case law, as well as add additional protections for employees.

Restrictive covenants often come in the form of noncompete provisions in employment contracts, that serve to prevent employees from working in a given industry or geographical area for a specified period of time. Employers already have significant bargaining power over the terms of an employment contract. People in search of a paycheck don’t typically have the experience or know-how to negotiate the terms of their employment, or the trained eye to spot a restrictive covenant buried within the document they end up signing. These types of contract provisions are very one-sided and tend to only benefit the employer. They are powerful tools for the employer to limit the ability of a departing employee to leverage any new experience or knowledge to use in competition to that employer. Prospective employees should carefully read any employment contract before signing, paying close mind to look for any provisions restricting their employment activities after the employment relationship has ended.

The Solari/Whitmyer test has long been the standard by which New Jersey courts determine the enforceability of restrictive covenants. The test incorporates two influential New Jersey Supreme Court cases speaking to the enforceability of restrictive covenants. Under the test, a covenant is reasonable if it: (1) serves to protect the legitimate business interests of the employer; (2) imposes no undue hardship on the employee; and (3) is not injurious to the public. Ingersoll-Rand Co. v. Ciavatta, 110 N.J. 609 (1988); (quoting Whitmyer Bros. Inc. v. Doyle, 58 N.J. 25, 32-33 (1971), see also Solari Indus Inc. v. Malady, 55 N.J. 571 (1970)).

The Bill provides that a restrictive covenant will be enforceable if it meets a list of ten criteria: (1) the covenant must be in writing and signed by both parties and must expressly state that the employee has a right to consult with counsel prior to signing (2) the provision must be narrow in scope to protect only legitimate business interests, such as the employer’s trade secrets or other confidential information; (3) the restriction on post-employment activity may not exceed 12 months following termination and must be reasonably limited in geographical area; (4) geographical restrictions must be limited to the areas where the employee provided services or had a material presence during the two years preceding the termination of employment and not prohibit the employee from seeking employment in other states; (5) the scope of proscribed activities must be reasonable and limited only to the “specific types of services” provided by the employee during the last two years of employment; (6) the agreement must not penalize current or departing employees from challenging enforceability; (7) the agreement cannot contain a choice of law provision that circumvents the requirements of the bill; (8) the provision cannot require employees to waive rights afforded to them under the bill; and (9) the agreement must not restrict employees from providing services to a client of the employer if the employee did not solicit or initiate the client; and (10)  the agreement must not be overburdensome or be inconsistent with public policy.

The bill further provides that restrictive covenants are unenforceable for certain categories of employees such as: nonexempt employees under the Fair Labor Standards Act (“FLSA”), students working as interns or in short-term employment, apprentices, seasonal or temporary employees, independent contractors, low-wage employees, or employees under the age of 18. In addition, the bill provides that a restrictive covenant will not be enforceable against an employee whose term of employment was less than one year. Also, employers would be required to give notice of their intent to enforce the agreement no later than 10 days after the termination of the employment relationship. Absent notice, the agreement is considered void.

The Bill also extends to no-poach agreements, which are contract provisions preventing other employers from hiring employees. The Bill declares any such provision applying to a low-wage employee to be contrary to public policy and void.

The bill also provides for compensation of employees at 100% of their rate of pay by their former employer during the period of any permissible restrictive covenant, unless the employee was terminated for misconduct or breaches the restrictive covenant. Such a requirement would compensate employees for the duration of the non-compete as the impact of a non-compete generally results in an employee being unable to find work for a longer period of time.

Under the bill, employees may bring civil actions against the employer for violation of the law, as long as the action is commenced within two years from the later date of when the prohibited agreement was signed, when the employee learned of the prohibited agreement, when the employment relationship is terminated, or when the employer takes any steps to enforce the agreement.

The bill expressly states that the courts will have jurisdiction to void any agreement, to grant other equitable relief as needed, to order payment of liquidated damages up to $10,000 and compensatory damages, and attorneys’ fees and costs. Finally, the bill includes a posting requirement, where employers must post a copy of the bill in a prominent place in the work area.

Click here to read the bill: https://pub.njleg.gov/Bills/2022/A4000/3715_I1.HTM.

Hopefully this bill will be enacted into law and allow more New Jersey employees to freely pursue other opportunities without restriction after they are separated from employment.

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