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

by Saul Ewing Arnstein & Lehr LLP


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.


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.

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