Finding and retaining good employees is increasingly difficult for New Jersey employers. We are in an exceptionally tight labor market, where workers expect higher wages and better benefits, or they will look for them elsewhere.
Dressel/Malikschmitt has served as outside general counsel to a number of New Jersey institutions eager to update their employment contracts, policies, and employee handbooks to be more appealing to employees.
As such, we are keenly aware that right now many businesses are revising their restrictive covenants, commonly referred to as non-compete agreements. Restrictive covenants are one of the tools businesses can use to help them retain employees, or at least limit the potential damage if a key employee leaves.
In the past, New Jersey businesses have relied on them to protect themselves from the threat posed by employee departures, but pushback from employees, and pressure from policy-makers, has many businesses taking a closer look at their existing agreements.
What is a Restrictive Covenant?
New Jersey employers frequently require workers to sign restrictive covenants as part of their on-boarding or promotion process. Employers rely on restrictive covenants to protect trade secrets, confidential information, and client relationships, and ensure that their investment in an employee’s training will not end up benefiting a competitor.
The two most common types of covenants are non-compete and non-solicitation policies. A non-compete policy prevents an employee from working for a competitor for a certain period of time, and/or within a certain geographic area, after leaving their current position. A non-solicitation or no-poaching clause forbids an employee from persuading clients, customers, or fellow employees to leave with them when they take a new job.
The New Jersey statutes do not address restrictive covenants, but litigation surrounding them has provided Garden State employers with some general guidelines for what is and is not allowed. Under current precedent, restrictive covenants will typically be upheld if they are no broader than necessary to protect a legitimate interest of the employer, impose no undue hardship on the employee, and are not injurious to the public. The key factors courts consider are the duration of the agreement and the geographic area it covers.
New Jersey Lawmakers Considering Limits on Restrictive Covenants
There are relatively few areas of employment law that have not been formally written into our state statutes, and restrictive covenants are one of them. New Jersey lawmakers are now questioning the wisdom of allowing the courts free reign on this topic.
Legislation that would formally codify the law on restrictive covenants is now pending in the New Jersey state legislature. However, A3715/S1410 would do a lot more than memorialize the current balancing test applied by the courts.
Under the bill, a restrictive covenant would only be enforceable if:
- (1) If the agreement is entered into in connection with the commencement of employment, the employer must disclose the terms of the agreement in writing to the prospective employee. The agreement must be signed by the employer and the employee and expressly state that the employee has the right to consult with counsel prior to signing.
- (2) The agreement may not be broader than necessary to protect the legitimate business interests of the employer, including the employer’s trade secrets or other confidential information that would not otherwise qualify as a trade secret.
- (3) The agreement may restrict the employee’s engaging in activities competitive with the employee’s former employer for a period not to exceed 12 months following the date of termination of employment.
- (4) The agreement must be reasonable in geographical reach and limited to the geographic 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, and may not prohibit an employee from seeking employment in other states.
- (5) The agreement must be reasonable in the scope of proscribed activities in relation to the interests protected and limited to only the specific types of services provided by the employee at any time during the last two years of employment.
- (6) The agreement must not penalize an employee for defending against or challenging the validity or enforceability of the covenant.
- (7) The agreement must not contain a choice of law provision that would have the effect of avoiding the requirements of the bill, if the employee is a resident of or employed in the State at the time of termination of employment and has been for at least 30 days immediately preceding the employee’s termination of employment.
- (8) The agreement must not waive an employee’s substantive, procedural and remedial rights provided under the bill, any other act or administrative regulation, or under the common law.
- (9) The agreement must not restrict an employee from providing a service to a customer or client of the employer, if the employee does not initiate or solicit the customer or client.
- (10) The agreement may not be unduly burdensome on the employee, injurious to the public, or inconsistent with public policy.
These requirements will make crafting and enforcing restrictive covenants much more difficult. For example, the amount of time a non-compete can be in place is halved, and the geographic restrictions could be a problem for companies that have a large footprint or allow workers to work remotely.
The bill would also forbid employers from requiring certain workers agree to restrictive covenants:
- (1) an employee who is classified as nonexempt under the federal “Fair Labor Standards Act of 1938” (29 U.S.C. s.201 et seq.);
- (2) an undergraduate or graduate student that undertakes an internship or otherwise enters into a short-term employment relationship with an employer, whether paid or unpaid, while enrolled in a full-time or part-time undergraduate or graduate educational institution;
- (3) an apprentice participating in an apprenticeship program registered by the Office of Apprenticeship of the U.S. Department of Labor and meeting the standards established by the office, or registered by a State apprenticeship agency recognized by the office;
- (4) a seasonal or temporary employee;
- (5) an employee that has been terminated without a determination of misconduct or laid off by action of the employer;
- (6) an independent contractor;
- (7) an employee under the age of 18;
- (8) a low-wage employee; or
- (9) an employee whose period of service to an employer is less than one year.
On top of all of this, the legislation requires employers to provide former employees covered by a restrictive covenant full pay plus benefits for the full length of time the restrictive covenant is in effect.
Contact Dressel/Malikschmitt Today to Update Your Employment Agreements
The goal of this legislation is not codifying existing law, but discouraging New Jersey employers from using restrictive covenants at all.
And New Jersey is not the only jurisdiction where policies like this are being considered. Similar legislation has been introduced in a number of other states. At the federal level, both Congress and the Federal Trade Commission are considering policy changes that would limit non-compete agreements.
Any New Jersey employer who uses restrictive covenants to protect their business must be aware that the law in this area may soon be changing. The Dressel/Malikschmitt team is advising a number of businesses in New Jersey and beyond as they consider whether to make changes to their existing employment documents.
Our experienced attorneys are here to guide employers as our state and federal employment laws evolve. Please contact us to schedule a meeting.