New Jersey’s New Year’s Resolution: A New Law Limiting Restrictive Covenants?

  • Legislation introduced in New Jersey would significantly restrict the use of post-employment restrictive covenants.
  • While the bill is still pending, it highlights a growing trend to limit the use of non-competition agreements in employment.

Currently pending in the New Jersey Legislature is a bill that would upend decades of New Jersey jurisprudence governing restrictive covenants in employment contracts and severance agreements, and impose an array of new requirements for restrictive covenants.  The bill, AB 3715/SB 1410, would curtail an employer’s ability to require post-employment restrictive covenants with its employees. The bill would not only apply to non-competition provisions, but also to non-solicitation provisions regarding customers/clients and employees as well as confidentiality/non-disclosure provisions. Should the bill pass, New Jersey employers would still be able to require or request that certain employees enter into restrictive covenant agreements as a condition of employment or severance agreement, but only if the post-employment restrictions and agreements complied with the new requirements.  The bill would also create a private cause of action against employers that do not implement these new requirements, with potential damages including (among other things) an award of attorneys’ fees and costs.  

The bill would add a high cost to employers choosing to enter into such agreements, requiring monetary payment to an employee after termination. The bill would also place limits on geographic enforcement and the types of activity that could be curtailed.

Unlike under common law, the bill would expressly prohibit employers from enforcing restrictive covenant agreements with respect to employees seeking employment across state lines. Given New Jersey’s close proximity to cities such as Philadelphia and New York City, which are hubs of business activity, this restriction might not allow New Jersey employers to properly protect their legitimate business interests that extend outside of New Jersey. The bill would not allow agreements to prohibit employees from working with an employer’s clients or customers as long as the employee did not initiate the contact. These type of “non-acceptance of business” agreements have previously been enforced by New Jersey courts, which do not limit the definition of “solicitation” to first contact. Further, the bill would limit restrictive covenants for a period not to exceed 12 months following termination of employment.

The bill would render restrictive covenant agreements unenforceable against a broad array of different individuals. For instance, the bill would not permit restrictive covenants for nonexempt employees under the Fair Labor Standards Act of 1983, undergraduate or graduate students in an internship or other short-term employment – regardless of pay – while enrolled in a graduate or undergraduate program, an apprentice participating in a registered apprenticeship program, a seasonal or temporary employee, an employee terminated without a determination of misconduct or laid off by the employer, an independent contractor, an employee under the age of 18, or a low-wage employee (an employee making less than the statewide average weekly wage).

Most notable—and perhaps most concerning for New Jersey employers—the bill would make restrictive covenant agreements unenforceable against employees who were employed for a period of less than one year. This could leave employers vulnerable to people who seek to “learn the ropes” and take advantage of an employer’s goodwill to unfairly compete against the employer as long as the employee resigns before their one-year anniversary.  

Another striking requirement of the proposed bill is that for the period of enforcement of the non-compete provision, the bill would require employers to pay an employee 100% of what the employee would have been entitled if they had continued to work for the employer. This includes benefit contributions required to maintain fringe benefits to which the employee would have been entitled. Fringe benefits are defined as vacation leave, sick leave, medical insurance plans, and any other benefit of economic value. Therefore, if an employer had a noncompete agreement lasting 12 months (the maximum time allowed) after the termination of employment, that employer would have to continue paying the employee as if that employee still worked for the employer regardless of whether the employee started another job. The bill would also prohibit an employer from unilaterally discontinuing or failing to make payments unless the employee breaches the agreement. There is an exception to this payment requirement if the employee is terminated for misconduct.

The bill explicitly provides a cause of action for employees against employers that violate a restrictive covenant agreement and sets forth damages. A prevailing employee could be entitled to payment of liquidated damages (capped at $10,000), lost compensation, damages, and reasonable attorneys’ fees and costs.

The bill would also impose strict notice and form requirements. Employers wishing to require a restrictive covenant as a condition of employment would need to do so in writing by the earlier of a formal offer of employment or 30 business days before the commencement of employment. Should the employer wish to enter into an agreement after employment commences, the employer would have to provide the agreement to the employee at least 30 business days before the agreement became effective. The agreement must also state that the employee has the right to consult with counsel prior to signing the agreement. Both employer and employee would be required to sign the agreement.

The bill would impose rigorous timing requirements. For example, under the bill, an employer would have to notify the employee in writing of its intent to enforce the agreement within 10 days after the termination of the employment relationship. The agreement would be void if the employer failed to do so, with the exception being if the employee had been terminated for misconduct.   

If passed, the bill would take effect immediately but would not be retroactive. In other words, the bill would not apply to agreements in effect on or before the date of enactment.

Both the Assembly and Senate companion bills remain in committee for now. Littler will closely monitor their progress. If either bill were to eventually become law in some form, New Jersey would join a number of states that have already passed laws significantly limiting restrictive covenants.  Indeed, there are more than 30 such states (plus the District of Columbia), and that number continues to grow.  The Federal Trade Commission even recently weighed in; the FTC proposed a rule on January 5, 2023, that would ban all non-compete agreements with limited exceptions. 

New Jersey employers should track this proposed FTC rule and the pending New Jersey bill ensuring their attorneys review their restrictive covenant agreements on at least an annual basis to ensure compliance with any federal rules, passed laws, and recent court decisions.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.