A few months ago, New Jersey's legislature proposed some of the strictest limits on non-compete agreements in the country, with Senate Bill S3518 and its companion bill, Assembly Bill NJ A5261.
The Purpose Behind These Bills
Without conceding that the New Jersey legislature's assertions are factually correct, I must give credit where it's due; they come right out and state why they want to pass this legislation at the beginning:
"The Legislature finds and declares that:
a. Post-employment contracts and severance agreements that restrict or prohibit competition, also known as “restrictive covenants,” “covenants not to compete,” or “non-compete agreements,” impede the development of business in the State by driving skilled workers to other jurisdictions and by requiring businesses to solicit skilled workers from out-of-State.
b. These contracts and agreements 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.
c. Limiting severance agreements 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 Highlights of Senate Bill S3518 and Assembly Bill NJ A5261
- Mandatory 30-Day Review Period. Employees must be given 30 days to review a non-compete before it can become effective
- Non-Competes Only Valid as a Last Resort. When possible, employers must use alternatives to non-compete agreements, such as non-solicitation provisions pertaining to the business's customers, vendors, referral sources or employees, confidentiality or non-disclosure agreements where those will adequately protect the employer's legitimate business interests
- 12-Month Cap on Non-Competes. The non-compete provision may not exceed 12 months following termination
- Employees Can't Be Hurt For Challenging Validity of a Non-Compete in Court. The agreement shall not penalize an employee for defending against or challenging the validity or enforceability of the covenant. On the other hand ...
- Employers CAN be Hurt if They Lose Litigation Over a Non-Compete. In addition to voiding the non-compete, the Courts will also be authorized to award the former employee liquidated damages of up to $10,000, as well as reimbursement of her lost compensation, damages and reasonable attorneys' fees
- Employers Can't Choose Which State's Laws Govern. The bills provide that "[T]he agreement shall not contain a choice of law provision that would have the effect of avoiding the requirements of this section, 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"
- Absent Solicitation, Terminated Employees Can Continue Servicing Customers.The agreement shall 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
- Failure to Effectuate 10 Days' Notice Vitiates Non-Compete. Unless the employee is terminated for "good cause," if the employer fails to notify the employee that they intend to enforce the non-compete within 10 days of termination, the non-compete will be deemed void
- "Garden Leave" Provision.While the non-compete remains in force (and unless the employee was terminated for "good cause"), the employer must pay the terminated 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 non-compete period
- No "Blue-Pencilling". Under both of these bills, "[A]ny provision of an agreement established under this section shall be, to the extent it conflicts with this section, void and unenforceable."
The Takeaways
At this point, no one really knows whether these companion bills will ultimately become law. But one thing is certain: These bills do raise an awful lot of questions, such as the following:
(1) Is a provision allowing an employer to recover its reasonable legal fees in the event it is deemed the prevailing party in litigation over the agreement inherently invalid?
(2) To what extent, if any, are non-solicitation, confidentiality or non-disclosure agreements covered under these bills?
(3) How is active vs. passive solicitation of customers, clients or employees defined under these proposed bills?
One other thing is equally clear:
Even if these bills are not ultimately passed, there are a number of people in New Jersey's legislature that want to see non-compete agreements tightly hemmed in. Consequently, employers - even in New York - who employ New Jersey residents would be wise to take heed, and make sure that going forward, their restrictive covenants are narrowly tailored to protect their legitimate business interests.
