Strategic partnerships can be crucial to the success of a business. Restrictive covenants play a vital role in these agreements, offering valuable protection for your business interests while posing potential challenges—if not handled carefully.
New Jersey has long enforced reasonable restrictive covenants, but state lawmakers are now considering legislation that could substantially limit the scope and enforceability of these covenants.
Crafting a well-thought-out partnership agreement can be both challenging and rewarding. Let’s take a look at the proposed legislation and its potential impact on businesses in New Jersey.
New Jersey and New York: a shared legal landscape
New Jersey often looks to New York for guidance on employment law. For example, in 2014, New York City enacted the Earned Sick Time Act, requiring private-sector employers to offer paid sick leave. This groundbreaking legislation prompted other jurisdictions, including New Jersey, to explore similar measures.
Following in New York City’s footsteps, New Jersey passed the New Jersey Paid Sick Leave Act in 2018. The New Jersey law closely resembles the New York City law, including provisions allowing private-sector employees to use paid sick leave for their own illnesses, caring for family members, or addressing domestic violence-related issues.
It’s no surprise, then, that New Jersey is now considering legislation to further limit the enforceability of restrictive covenants, something that New York’s proposed Senate Bill S1300 strives to accomplish.
The proposed legislation: Assembly Bill 3715
New Jersey seeks to join the growing number of jurisdictions that have curtailed the scope and enforceability of restrictive covenants with New Jersey’s Assembly Bill 3715 (AB 3715). If passed, the bill would introduce several new requirements and limitations for employers, including:
- Codifying existing common law standards for enforceable restrictive covenants while adding new limitations on their duration and geographic scope
- Requiring a minimum 30-day notice to employees before a restrictive covenant becomes effective
- Limiting restrictions on employees working with customers or clients of their former employer, provided the employee did not initiate or solicit those customers or clients
- Prohibiting choice of law provisions that would allow employers to avoid applying New Jersey law to restrictive covenants
- Excluding certain categories of workers, such as non-exempt employees under the Fair Labor Standards Act, independent contractors, and low-wage employees, from being subject to restrictive covenants
- Requiring employers to pay employees 100% of their compensation during the restricted period, up to 12 months following the termination of employment
- Prohibiting “no-poaching” agreements between employers
- Requiring employers to provide written notice of their intent to enforce a restrictive covenant within 10 days of an employee’s termination
- Mandating employers to post a copy of the legislation or an approved summary in a prominent place in the workplace
- Creating a private right of action for employees to bring a civil lawsuit against employers who violate the act, with a two-year statute of limitations
The potential impact on New Jersey businesses
If passed, AB 3715 could significantly affect businesses in New Jersey. Employers must meticulously review and revise their restrictive covenant agreements to ensure compliance with the new law. Additionally, businesses may face increased costs associated with paying employees during the restricted period and potential litigation from employees challenging restrictive covenants.
Despite these challenges, the proposed legislation is not expected to be retroactive, meaning existing restrictive covenants would not be affected. Nevertheless, businesses should proactively review their current agreements and stay informed about the latest developments in restrictive covenant legislation.
How might AB 3715 affect restrictive covenants in the partnership context?
As New Jersey considers AB 3715 to further limit the scope and enforceability of restrictive covenants, it’s vital to explore the potential implications of this legislation in the context of partnership relationships.
New Jersey, like many other states, has tried to balance the competing interests inherent in restrictive covenants by enforcing only those covenants that are reasonable in scope, duration, and geographic area. AB 3715 aims to codify many of those terms, as opposed to leaving the concept of “reasonable” up to the courts.
Some benefits of this approach may include:
- Protecting partners’ rights: By limiting the scope and enforceability of restrictive covenants, AB 3715 seeks to prevent partners from being unduly restricted in their ability to form new partnerships or start new ventures after leaving an existing partnership.
- Encouraging innovation and collaboration: By restricting the duration and geographic scope of restrictive covenants and prohibiting no-poaching agreements, the bill promotes innovation and collaboration in the market, allowing partners to contribute to the economy by working with new partners or starting new businesses.
- Fostering a healthy business environment: By limiting restrictive covenants in partnerships, AB 3715 encourages a more open and competitive business environment. This can lead to increased collaboration between partnerships, knowledge sharing, and the development of new ideas and innovations. Ultimately, this can contribute to a healthier and more dynamic business ecosystem, benefiting not only individual partnerships but also the wider economy.
However, while AB 3715 is intended to protect employees and promote a healthy business environment, applying it to partnership agreements might be seen as overreaching for several reasons:
- Distinct nature of partnerships: Unlike the traditional employer-employee relationship, partnerships typically involve individuals who share ownership, decision-making, and responsibility for the business’s success. Partners usually possess valuable proprietary information, including trade secrets, client relationships, and strategies. Restricting the enforceability of covenants in partnership agreements could undermine the protection of these vital interests and destabilize the partnership itself.
- Negotiating power: Partners generally have more negotiating power than employees when entering into partnership agreements. They can actively discuss and negotiate the terms of restrictive covenants to ensure they are fair, reasonable, and mutually beneficial. Imposing legislation that limits the scope of restrictive covenants in partnerships unnecessarily interferes with the ability of partners to negotiate agreements that are specifically tailored to their unique circumstances.
- Impact on partnership dissolution: Restrictive covenants in partnership agreements often play a crucial role in establishing a clear framework for dealing with partnership dissolution or the departure of a partner. Limiting the enforceability of these covenants could create ambiguity and increase the potential for disputes during such transitions, which could harm the partnership’s ongoing operations and the interests of remaining partners.
In light of the ongoing developments surrounding AB 3715 and its potential impact on restrictive covenants in the partnership context, businesses must stay informed and vigilant. While the legislation aims to protect individual rights and promote a competitive business environment, it’s critical to strike the right balance between these objectives and the unique needs of partnership relationships.
By understanding the nuances of the proposed legislation and its potential implications, businesses can better prepare themselves for any changes that may come, ensuring they continue to thrive in a dynamic, evolving marketplace.
Thriving partnerships, thriving businesses
Partnership agreements can be complex. Each individual involved comes to the table with different expectations and needs, but a well-drafted partnership agreement can provide a solid foundation for growth, profitability, and longevity.
Dressel/Malikschmitt LLP is a boutique business formation law firm with deep experience helping both business owners and partners draft partnership agreements, negoatiate terms, resolve disputes, and more. If you need support w, please contact us online or give us a call at 848.202.9323.
The content in this article is for general informational purposes only. It should not be construed as legal advice or a substitute for legal advice. The information above does not create an attorney-client relationship. Any reliance you place on such information is therefore strictly at your own risk.