On May 2, 2022, a bill “limiting certain provisions in restrictive covenants” was introduced in the New Jersey State Assembly. In recent years, similar bills have been proposed in various state legislatures. Some such bills, after much lobbying, haggling and revisions, have even been enacted into law, including, for example, in Massachusetts, Illinois and Washington.
While it is unclear whether (and in what form) the New Jersey bill eventually might be enacted into law, the bill as introduced nonetheless is worth a look because it contains a treasure trove of the types of limitations that appear in similar bills introduced nationwide, along with some novel limitations. The bill focuses on provisions in post-employment and severance agreements that restrict or prohibit competition. It includes the following proposed limitations:
- Notice to the employee of the restriction – Existing employees must be given 30 business days’ notice of the restriction, while prospective or new employees must be provided with the restriction in writing by the earlier of a formal offer of employment or 30 business days prior to the commencement of employment. While a notice requirement is common in similar bills in other states, the 30-day period proposed in New Jersey is unusually long.
- Twelve-month limitation on the duration of any post-employment restriction on the employee’s competitive activities – this is fairly standard in non-compete bills and statutes.
- Codification of existing common law regarding restrictive covenants – e., the restriction must be reasonable in geographic scope and no broader than necessary to protect the legitimate business interests of the employer, which may include the employer’s trade secrets and confidential information.
- Choice of law – the agreement containing the restrictive covenant may not contain a choice of law provision that would have the effect of avoiding the requirements of the section. Other states have attempted to impose requirements like this, perhaps most saliently California.
- Designation of certain classes of employees who are not subject to restrictive covenants, including:
- employees classified as non-exempt under the Fair Labor Standards Act;
- undergraduate or graduate student interns;
- seasonal or temporary employees;
- employees terminated without a determination of misconduct;
- independent contractors;
- employees under age 18;
- low wage employees (defined as employees whose average weekly earnings are less than the statewide average weekly remuneration as determined pursuant to New Jersey statute); and
- employees who have worked for the employer for less than one year.
- Post-employment notice within 10 days from termination by the employer of whether it intends to enforce the restrictive covenant.
- Payment to the employee during the operative period of the restrictive covenant at a rate equal to 100% of the employee’s rate of compensation, plus continuation of fringe benefits – this provision is particularly and unusually favorable to employees in comparison to the very few non-compete statutes in other states that require some payment to the employee during the non-compete period.
- Liquidated damages for violation of the restrictive covenant may not exceed $10,000 – this, too, is unusual; most non-compete bills or statutes do not address liquidated damages.
The New Jersey bill also includes provisions that would bar employers from engaging in no-poach agreements with other employers. The bill defines “no-poach agreement” as an agreement between employers or between an employer acting as a contractor and any legal person acting as a contractee that restricts or hinders the ability of an employer to contract for the services of a low-wage employee. If these agreements are entered into by competitors, as opposed to collaboration partners, subcontractors and the like, they could also violate federal antitrust laws, which is an area the Department of Justice has been focused on lately.
Finally, the bill provides that an employee subject to a restrictive covenant or covered by a no-poach agreement may bring a civil action against an employer or person who violates the act, and sets forth a two-year statute of limitations for such claims. This, too, is out of the ordinary.
The New Jersey bill is a long way from being enacted, and indeed may never become law, but employers with New Jersey employees should be aware that some changes could be coming that will necessitate revisions to their practices and forms with respect to non-competes and other restrictive covenants. It is also a good example of efforts currently being made in many employee-friendly states to limit the scope and enforceability of non-competes.
- Member of the Firm