Bill introduced in New Jersey Legislature would invalidate restrictive covenants for individuals collecting unemployment benefits

by Saul Ewing LLP
Contact

Summary

Currently pending in the New Jersey State Legislature is a bill that, if passed, would invalidate any covenant, contract or agreement not to compete, not to disclose or not to solicit, entered into by any individual with the individual’s most recent employer, if the individual is found to be eligible for unemployment compensation benefits. If enacted in its current form, Assembly Bill 3970 would effectively provide such persons with a “get out of jail free” card from their non-compete, non-disclosure or non-solicit agreements with their most recent employer.

Background

On April 4, 2013, Assemblymen Peter J. Barnes, Joseph V. Egan, and Wayne P. DeAngelo introduced Assembly Bill 3970 that states that “[a]n unemployed individual found to be eligible to receive benefits pursuant to the ‘unemployment compensation law’, . . . shall not be bound by any covenant, contract or agreement, entered into with the individual’s most recent employer to not compete, not disclose or not solicit.” The stated rationale for the link to unemployment eligibility is that workers who lose their employment through no fault or wrongdoing of their own, and are thus able to collect unemployment benefits, should not be held to a restrictive covenant. The introduction of this bill marks one of the first times the New Jersey Legislature has attempted to regulate by statute an area that has been typically left to the sound discretion of the judiciary.

Specifically, in New Jersey, the law regarding the enforcement of restrictive covenants, often contained in employment agreements, had been made, developed and refined by the courts. Generally speaking, to be enforceable under New Jersey law, a restrictive covenant must be reasonable, which requires the court to evaluate whether the covenant at issue (1) protects a legitimate interest of the employer; (2) imposes no undue hardship upon the employee; and (3) is not injurious to the public interest. Over the years, New Jersey courts have established bodies of case law regarding the enforceability of restrictive covenants in a variety of different contexts. Further, while weighed in determining the enforceability of the contract along with considerations of reasonableness, there is no bright-line rule against enforceability of a restrictive covenant when an employee is involuntarily terminated. Thus, involuntary termination is not necessarily fatal to the enforcement of a restrictive covenant. If passed, Assembly Bill 3970 would override the judiciary’s traditional role in determining the enforceability of a restrictive covenant, in cases where the former employee received unemployment benefits.

With regard to eligibility for unemployment benefits in New Jersey, an employee who leaves work voluntarily with good cause or is terminated for reasons other than misconduct will generally be found eligible for benefits under the New Jersey unemployment compensation law. To establish that an employee engaged in misconduct sufficient to defeat eligibility for unemployment compensation, the employer must establish that the terminated employee engaged in conduct which is “improper, intentional, connected with one's work, malicious, and within the individual's control, and is either a deliberate violation of the employer's rules or a disregard of standards of behavior which the employer has the right to expect of an employee.” In view of the relative ease with which terminated employees can qualify for unemployment compensation, Assembly Bill 3970 likely will impact a significant number of employers in the state.

Further, in light of the extremely broad language of Assembly Bill 3970, there may be unintended consequences if this bill is passed. By way of example, employers would have greater incentive to contest workers’ eligibility for unemployment benefits, in order to ensure that their restrictive covenants remained enforceable. Further, because employees must meet certain time or income bases to become eligible to obtain unemployment compensation there is potential to create a subset of employees who restrictive covenants are not affected by the law based on a technicality regarding their eligibility for unemployment benefits.

What It Means for Employers

Importantly, Assembly Bill 3970, if passed, would have no retroactive effect, and thus, only apply to a covenant, contract or agreement entered into after the effective date of the law. Nevertheless, if passed in its current form, it will create significant issues for employers seeking to protect their businesses, customer bases, confidential information and trade secrets from exploitation by departing employees. Indeed, Assembly Bill 3970 does not even contain an exemption for standard non-disclosure provisions barring former employees from using or disclosing their employer’s confidential information for their own benefit or the benefit of another. To prepare for the potential passage of the bill, employers should review their employment agreements and, where appropriate, get employees to execute covenants now, before any change in the law occurs.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Saul Ewing LLP | Attorney Advertising

Written by:

Saul Ewing LLP
Contact
more
less

Saul Ewing LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!