By: Jennifer Weitz, Esq. and Ty Hyderally, Esq.

A restrictive covenant is an agreement imposed by an employer, under which a potential or departing employee agrees to not engage in certain types of activities that may harm the employer’s business. Restrictive covenants are usually one of the four following types:

• A non-compete agreement attempts to disallow competition against the employer within a certain geographic area
• A non-solicitation agreement attempts to bar the employee from approaching the employer’s current, prior, or prospective customers
• An anti-raiding provision attempts to prohibit soliciting the employer’s employees to work at a competing business
• A confidentiality agreement attempts to prohibit the employee from disclosing or using the employer’s proprietary or confidential information.

An employee may be required to enter into a restrictive covenant in order to be considered for a job with the company, or to be allowed to continue his/her employment, or as a condition of receiving severance pay.

New Jersey courts have found restrictive covenants enforceable, for some employees, if they protect the legitimate business interests of the employer, do not impose an undue hardship on the employee, and do not harm the public. However, restrictive covenants must be reasonable in duration, geographic area, and scope of activity—an employer cannot put into a restrictive covenant any overly broad terms, and, if the agreement is contested, the employer has to show that the agreement is enforceable, based on the above criteria.

The New Jersey Legislature has introduced a bill (A3715 in the Assembly and identical S1410 in the Senate) that would codify the parameters surrounding restrictive covenants. Under the bill, a restrictive covenant would be enforceable as long as it meets the following requirements:

• If the agreement concerns a prospective employee, the employer must provide the terms of the agreement to the prospective employee in writing. The agreement must also state that the employee has the right to consult with an attorney before signing.
• The agreement must not be broader than necessary to protect the employer’s legitimate business interests (generally referring to an employer’s trade secrets or confidential information).
• The agreement cannot restrict the employee’s competitive activities, after separating from the employer, for more than 12 months following the date of separation.
• The agreement has to be reasonable in geographic reach, and cannot prohibit the employee from working in another state. It also must be limited to those areas in which the employee provided services or had a material presence, within the two years prior to the date of separation.
• The agreement must be reasonable regarding the types of activities it prohibits, in relation to the business interests protected, and limited to the specific types of services provided by the employee within the last two years of their employment.
• The agreement may not have a choice of law provision (that would allow a matter to be heard in a court outside of New Jersey, to sidestep the protections of the bill), if the employee is a resident of New Jersey or works here at the time of separation, and has been for 30 days immediately prior to the separation.
• The agreement cannot prevent an employee from providing services to a customer or client of the employer if the employee does not initiate or solicit the customer or client.

The bill also lists certain types of employees against whom restrictive covenants are not enforceable, such as undergraduate or graduate students working as interns, seasonal or temp workers, and independent contractors, among others.

Within 10 days of an employee’s separation from the employer, the employer must notify the employee, in writing, of its intent to enforce the agreement. An employer is also liable for certain payments to an employee while the covenant is in effect.

Lastly, the bill provides a private right of action for an employee against any employer or person who allegedly violates the bill. The employee has two years to bring an action from the latest date of:

• When a prohibited agreement was signed;
• When the employee learns of the prohibited agreement;
• When the employee separates from the employer; or
• When the employer tries to enforce the agreement

Restrictive covenants must balance fundamental and competing interests—the ability of an individual to freely pursue a job and livelihood, and a business’s ability to protect its assets. The proposed legislation would make into law the factors that New Jersey courts have followed for years in striving to reach just, equitable outcomes for all involved.

For more insight into restrictive covenants see our earlier blog on the issue here: https://www.employmentlit.com/2021/07/16/getting-rid-of-non-compete-agreements-maybe/

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