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New Jersey Legislature Wants to Limit Restrictive Covenants

Posted: December 13, 2017

In keeping with the national trend limiting the use of restrictive covenants, in November 2017, the New Jersey Senate introduced SB3518, a bill setting forth sweeping restrictions that would limit the enforceability of non-competes. The bill states that restrictive covenants “impede the development of business in the State by driving skilled workers” out of New Jersey, “discourage innovation and production, impose special hardships on employees . . . and constitute restraint of trade and commerce.” If passed, the bill would severely limit an employer’s ability to enter into and enforce restrictive covenants with employees.

As a threshold matter, SB3518 would explicitly ban the use of non-competes altogether for nine categories of employees: (1) “non-exempt” under the Fair Labor Standards Act; (2) seasonal or temporary workers; (3) employees who were laid off or terminated without good cause; (4) low wage employees; (5) undergraduate or graduate students who take short-term employment while continuing their education; (6) apprentices in a program registered with the Department of Labor; (7) independent contractors; (8) employees whose period of employment is less than one year; and (9) employees under the age of 18.

For other employees, the bill institutes a ten (10) factor test for restrictive covenants. In order for a restrictive covenant to be enforceable, it must satisfy the following requirements:

(1) If the agreement is entered into at the time of employment, the employer must disclose the terms of the agreement in writing, either at the time the formal offer is made, or 30 business days before the employment begins. If the agreement is entered into during employment, the employer needs to give the employee 30 days’ notice before it becomes effective. In both instances, the agreement must expressly state that the employee has the right to consult with counsel prior to signing.

(2) The agreement can be no broader than necessary to protect the employer’s legitimate business interests (trade secrets and other confidential information) and those interests cannot be protected through less restrictive means (e.g., confidentiality agreements and non-solicitation agreements).

(3) The restricted period cannot exceed one year.

(4) The geographic scope is limited to areas where the employer provided services or had a “material” presence during the past two years and cannot prohibit the employee from seeking employment in other states.

(5) The scope is limited to those services the employee provided within the past two years of employment.

(6) The agreement cannot penalize employees from challenging or defending against the validity or enforceability of the restrictive covenant.

(7) The agreement cannot include a choice of law provision that circumvents the New Jersey statute.

(8) The agreement cannot waive the employee’s substantive or procedural rights under New Jersey law. This would only apply if the employee was a resident of, or employed in New Jersey at the time of termination and for at least 30 days preceding the termination.

(9) The agreement cannot prohibit employees from “providing services to a customer or client of the employer, if the employee does not initiate or solicit the customer or client.”

(10) Broadly, the agreement cannot be “unduly burdensome on the employee, injurious to the public, or inconsistent with public policy.”

These requirements would limit, if not entirely eliminate a court’s ability to blue pencil an overly broad agreement and it would eliminate regional or nationwide restrictions. The bill also requires an employer notify a departing employer within 10 days if it intends to enforce the restriction. Failure to provide the notice voids the agreement. The bill also includes a statutorily mandated garden leave provision. Specifically, if the employer enforces the restriction, the employer is required to pay the employee an amount equal to 100% of the pay to which the employee would have been entitled had the employee still been employed. The employer is required to maintain benefits as well.

Additionally, the bill provides for monetary penalties for lost compensation, liquidated damages, and reasonable attorneys’ fees and costs for employers seeking to enforce restrictive covenants that run afoul of the bill’s requirements. The bill has been referred to the New Jersey Senate Labor Committee for consideration.