NJ Lawmakers: Invalidating Restrictive Covenants Will Assist the Unemployed


Citing the state’s jobless rate, three New Jersey state assemblymen are challenging the longstanding employer practice of restricting the post-employment activities of employees who are terminated or resign. On April 4, 2013, Assemblymen Peter J. Barnes, Joseph V. Egan, and Wayne P. DeAngelo introduced Bill A-3970, which would invalidate restrictive covenants involving an individual’s most recent employer, if the individual otherwise is eligible for state unemployment insurance benefits.

In New Jersey, employers can enter into post-employment restrictive covenants with employees, such as confidentiality, non-competition, and non-solicitation agreements. Such agreements are intended to prevent and combat unfair competition. State courts have historically enforced restrictive covenants that protect the former employer’s legitimate interests, impose no undue hardship on the employee, and do not harm the public.

The sponsors of A-3970 have tied the bill to unemployment eligibility, reasoning that New Jersey employees who are terminated or laid off should not be held to a restrictive covenant when it is already difficult to find work. The state’s unemployment rate in March 2013 was 9 percent—more than 4 percentage points higher than it was before the recession began in 2008.

A similar but less restrictive bill was introduced earlier this year in Maryland and is receiving mixed reviews from the state and strong opposition from the business community. Senate Bill 51 was criticized by the Maryland Senate Finance Committee, and Maryland's Department of Legislative Services (Department) determined that while implementing Bill 51 could diminish Maryland's unemployment costs by decreasing the duration of benefits for some individuals, the legislation’s overall impact would likely be minimal. The Department also found that Bill 51 could hurt small businesses, because former employees would be able to immediately compete against their previous employer, solicit the employer's customers, and/or share confidential information.

In New Jersey, A-3970 is already meeting with disapproval; opponents say it could diminish an employer's ability to protect its confidential information, its customer relationships, and its economic position in the marketplace. Supporters of the bill note, however, that it would only apply prospectively, would not eliminate or limit restrictive covenants already in effect, and would not apply to individuals who are ineligible for unemployment compensation benefits. Nevertheless, the mere possibility of A-3970 becoming law may prompt many employers to execute restrictive covenants with their employees now. If the bill becomes law, it would likely increase the number of employers that contest unemployment insurance benefits.

Ballard Spahr’s Labor and Employment Group routinely assists employers in all aspects of employer/employee relations. If you have questions or concerns about restrictive covenants or Bill A-3970, please contact Steven W. Suflas at 856.761.3466 or suflas@ballardspahr.com, Mark F. Kowal at 856.761.3461 or kowalm@ballardspahr.com, or the member of the Group with whom you work.

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.

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