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In this month's newsletter, we will focus on the great state of New Jersey. Many of our clients, friends, and colleagues have a presence in New Jersey and there are almost certainly significant changes on the horizon. Newly-elected Governor Murphy has promised to raise the minimum wage, to legislate paid family leave, and to implement other measures similar to recent legislation in NYC and NYS. Also under consideration, as described below, is a sweeping new law that would regulate non-compete agreements in a way never seen before on the East Coast and which could potentially impact New York businesses as well.
New Jersey businesses should pay attention to all these developments. We at M&B are available to help you navigate the employment law landscape.
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Proposed Law Would Significantly Restrict the Use and Enforceability of Non-Compete Agreements
The NJ State Legislature has introduced proposed legislation (Senate Bill 3518, Assembly Bill 5261) which would drastically limit employers' presentation and enforcement of restrictive covenants, such as non-compete and non-solicitation agreements, in New Jersey. If enacted by the Legislature, the proposed statute will immediately and severely reduce NJ employers' ability to prevent unfair competition by former employees.
Under the proposed new law, employers could not enforce restrictive covenants at all against certain employees such as:
- Non-exempt employees, i.e., anyone eligible to receive overtime pay;
- Students taking internships or short-term employment, and employees under the age of 18;
- Employees that have been discharged without cause or laid off by the employer;
- Independent contractors;
- "Low-wage" employees (defined as those employees who make less than approximately $62,000 per year); and
- Employees whose period of service to the employer is less than one year.
For those employees not falling into the exempt categories above, restrictive covenants will be enforceable only if each of ten requirements is met:
- Employees will have to be given 30 days to consider whether they wish to agree to the restrictions. The agreement must be signed by both employer and employee, and "expressly state that the employee has the right to consult with counsel prior to signing."
- The agreement must be no broader than necessary "to protect the legitimate business interests of the employer, including the employer's trade secrets or other confidential information."
- The duration of the restriction must be no more than 12 months.
- The prohibited activity would have to be limited to the geographic area in which the employee provided services "during the two years preceding the date of termination of employment," and the agreement could not prohibit the employee from seeking employment in other states-even if just across the Hudson River.
- The agreement must be "reasonable" in scope.
- The agreement may not penalize an employee for defending against or challenging the validity or enforceability of the restrictive covenant.
- If the employee resides or works in NJ, the agreement cannot contain a choice of law provision that would apply another state's substantive law. This provision may make ineffective NY employers' restrictive covenants sought to be enforced against their NJ-resident employees.
- The agreement may not waive an employee's "substantive, procedural and remedial rights" provided under the bill, any other law or administrative regulation, or under the common law.
- The proposed statute prohibits agreements that "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."
- The agreement may not be "unduly burdensome on the employee, injurious to the public, or inconsistent with public policy."
The proposed legislation also includes the equivalent of a mandatory "garden leave" provision: if the agreement is deemed enforceable, the employer must pay the employee an amount equal to 100% of the pay to which the employee would have been entitled, and maintain the employee's "fringe benefits," including medical insurance, during any period after employment that the covenant was still effective.
The proposal also provides remedies to the employee if the employer violates the statute, including liquidated damages of up to $10,000, lost compensation, and attorneys' fees.
In short, if enacted, the bills will significantly decrease NJ employers' ability to protect competitively sensitive information, and to restrict unfair competition by departing employees, much as California has done in seeking to protect its citizens' right to work.
Importantly for employers, although the bill provides that it will become effective immediately upon enactment, "it shall not apply to any agreement in effect on or before the date of enactment." All employers who currently use, or who are considering using, restrictive covenants should take immediate action to have their (proposed) contracts reviewed and, if appropriate, renewed or presented to their employees for execution.
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