New Jersey Introduces Proposed Legislation Limiting Use And Enforceability Of Non-Compete And Non-Solicitation Agreements

On May 2, 2022, the New Jersey Legislature introduced Bill A3715, adding to the growing number of states seeking to curtail the use of non-compete and non-solicitation agreements by employers. While passage of the bill is uncertain, A3715, if enacted in its current form, would make New Jersey one of the most inhospitable forums for employers seeking to enforce such agreements. Among a number of sweeping changes, including outright banning the use of post-employment restrictive covenants against a broad range of workers and otherwise limiting their duration to a maximum of 12 months, the proposed law further requires employers to pay 100 percent of the separated employee's wages and benefits during the duration of the restricted period.

Key features of the bill include:

Under the proposed law, restrictive covenants cannot be enforced against a broad range of workers

The bill proposes to prohibit the use of any agreement that seeks to limit post-employment competitive activities against various classes of workers, including among others:

• non-exempt employees
• seasonal or temporary employees
• employees terminated without a determination of misconduct or who are laid off
• independent contractors
• employees under the age of 18
• "low-wage employees," defined as an employee whose average weekly earnings during the year prior to termination are less than the statewide average weekly remuneration
• employees whose period of service to an employer is less than one year

The proposed law imposes strict requirements and limitations with regard to the use and scope of restrictive covenants by employers

Under current New Jersey law, a post-employment restrictive covenant is enforceable if (1) its terms are reasonably necessary to protect an employer's business interests; (2) does not cause undue hardship to the employee; and (3) does not impair the public interest. New Jersey courts have generally measured the reasonableness of a restrictive covenant by its temporal and geographic limitations. If enacted, the new legislation would codify certain aspects of existing common law, but also impose additional strict requirements and limitations with respect to their use and enforcement against employees not otherwise protected under the statute, including:

• Minimum 30 Days' Notice. Employers must disclose the terms of the restrictive covenant agreement to the prospective employee by the earlier of a formal offer of employment or 30 business days before commencement of employment. Existing employees must be provided with 30 business days' notice before the effective date of the agreement.
• Right to Counsel Must Be Stated. The agreement must be signed by the employer and expressly state that the employee has the right to consult with counsel prior to signing.
• Maximum Duration of 12 Months. The duration of the post-employment non-compete or non-solicitation cannot exceed 12 months.
• Scope Must Be Limited to Specific Territory and Services of the Employee. The geographic limitation of the restrictive covenant must be limited to the areas in which the employee provided services or had a material presence or influence during the two years preceding the date of termination of employment. Similarly, the scope of proscribed activities must be limited to the specific types of services provided by the employee at any time during the last two years of employment.
• Cannot Ban Work Outside New Jersey. The restrictive covenant cannot prohibit an employee from seeking employment in other states.
• Cannot Penalize Employee. The agreement cannot penalize an employee for defending against or challenging the validity or enforceability of the covenant. This puts into question the validity of fee shifting provisions contained in any such agreements.
• Cannot Circumvent New Jersey Law. The agreement cannot contain a choice of law provision that would have the effect of avoiding the requirements of the statute, if the employee resides or is employed in New Jersey and has been for at least 30 days prior to termination.
• Cannot Prohibit Acceptance of Business. The agreement cannot prohibit an employee from providing a service to a customer or client of the employer if the employee did not initiate solicitation.
• Must Post Copy of Statute. Employers must post a copy of the statute or an approved summary in a prominent work place in the work area.
• Must Provide Notice of Enforcement Within 10 Days After Termination. The employer must notify the employee in writing within 10 days after the termination of the employer's intent to enforce the agreement.

The proposed law mandates a "garden leave" type of payment

In addition to the foregoing, the new law contains a garden leave-type of provision that requires the employer to "pay the employee an amount equal to 100 percent of the pay which the employee would have been entitled for work that would have been performed during the period proscribed ...," in addition to benefits. The only exceptions are in the event of a breach by the employee or termination for misconduct.

No-poach agreements are expressly prohibited

The proposed law outright prohibits "no-poach" agreements, which are defined in the statute as "any agreement between employers ... that restricts or hinders the ability of an employer to contract for the services of a low-wage employee." This prohibition is consistent with recent federal efforts cracking down on no-poach agreements, including criminal prosecution by the Department of Justice alleging that such agreements amount to collusion and price fixing the labor market.

Agreements that do not comply are void and unenforceable, and may subject employers to statutory penalties

The proposed law would limit a reviewing court's ability to reform or blue pencil an overbroad restrictive covenant, mandating that any restrictive covenant that conflicts with the statute would be "void and unenforceable." In addition, the bill allows a reviewing court to order a variety of remedies, including injunctive relief, payment of liquidated damages, lost compensation and attorneys' fees.

Key takeaways

While the bill was reported favorably out of committee shortly after it was introduced, whether it will actually pass remains to be seen, and we will report on any significant progress. Prior efforts in New Jersey to legislate non-compete reform have stalled. However, given the recent trend of states enacting laws limiting the enforceability of non-compete agreements, particularly against lower wage workers, it would not be surprising to see New Jersey join the fray and pass some measure of reform, if not this bill. Indeed, the rationale behind the bill is consistent with the current view of policy activists and the Biden Administration that restrictive covenants, including non-compete agreements, stifle competition and workforce mobility. In this regard, the bill expressly states as its basis that restrictive covenants impede the development of business, drive skilled workers to other jurisdictions, discourage innovation and production, and impose special hardships on employees and specialized professionals. While these issues continue to be the subject of much debate, there can be no dispute that the use of restrictive covenants in New Jersey is under heightened scrutiny and there is the potential for drastic sweeping changes in the near future. New Jersey employers should thus closely monitor any legislative and judicial developments.

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