A Bill currently pending before the Legislature in New Jersey effectively re-writes the existing common law governing enforcement of employment non-compete agreements by placing substantial additional limitations on an employer’s ability to both enter into and enforce such agreements. All signs point to the likelihood that this Bill will become law.
An agreement not to compete (also known as a restrictive covenant) typically restricts an employee from competing with or soliciting clients from an employer for a period of time after the employee leaves the employer’s employ. These contractual provisions have historically been reviewed by courts on a case-by-case basis to determine their enforceability. They have typically been frowned upon as restraints on trade and as being the product of unequal bargaining power between employers and employees. However, they have been enforced by the New Jersey courts so long as they were deemed to be “reasonable” under the facts and circumstances of the specific case in terms of duration, scope, and geographic range. Moreover, even when found to be unreasonable, the New Jersey courts have generally elected to re-write otherwise unreasonable restrictions, rather than void the agreement as a whole, known as the “blue-pencil” doctrine.
The proposed Bill, a copy of which can be read HERE, provides that in order to be enforceable against an employee, a restrictive must meet certain criteria. Should the Bill become law, these requirements will substantially limit the enforceability of such covenants than under the current “reasonable” common law test applied by the courts. The Bill requires, in part, that the employer must disclose the terms of the agreement to the prospective employee in writing within a certain time period and it must be signed by both parties and expressly state that the employee has the right to consult with an attorney before signing; that the non-compete clause cannot be broader than necessary to protect the legitimate business interests of the employer; that the time period of the restrictive covenant may not exceed 12 months following termination of employment; and it must be reasonable in geographic reach and meet certain geographic criteria. The Bill significantly limits, if not eliminates, the ability of a court to rewrite a restrictive covenant to make it enforceable using the blue-pencil doctrine, and provides that an unreasonable agreement is now void.
The Bill also limits the categories of employees against whom a non-compete agreement may be enforced by specifically excluding large categories of employees including, but not limited to, employees who were terminated without a determination that he/she engaged in misconduct, independent contractors, employees classified as “nonexempt” under the Fair Labor Standards Act, and employees who earn less than the Statewide weekly average as determined by the New Jersey Department of Labor. Except in cases where the employee was terminated for misconduct, the employer must give the employee notice within 10 days following termination of the employment relationship that the employer intends to enforce the restrictive covenant, or else the covenant will be deemed void. It also provides employees with the right to bring a cause of action against an employer for violating its provisions. And of paramount significance is that the law would require an employer enforcing a restrictive covenant against a former employee to continue the former employee’s full pay and benefits for the duration of the period when the covenant is in place, except in cases where the employee was terminated for misconduct.
If passed, the effect of this law would be to significantly restrict an employer’s ability to enforce restrictive covenants against employees. The Bill expressly states that restrictive covenants “discourage innovation and production, impose special hardships on employees and specialized professionals who are trained to perform specific jobs, and may constitute restraint of trade and commerce.” It further provides that limitation of enforcement of such provisions “will stimulate New Jersey’s economy by preserving and providing jobs and by providing opportunities for employees to establish new business ventures and new job opportunities in the State.”
The Zazzali Firm will provide an update if and when this Bill is passed. In the meantime, if you have any questions regarding non-compete and how they may apply to you, the experienced attorneys at the Zazzali Firm are ready to answer any questions you may have.