New Jersey may be next up to join the growing number of states that significantly restrict the use of non-competition agreements in employment. As we discussed back in December 2017, a bill proposed in New Jersey at the time, Senate Bill 3518, would “impose significant restrictions and limitations” on the use of restrictive covenants in the employment context. Ultimately, SB 3518 died in committee, but a revival is underway.
On February 24, 2021, a renewed bill seeking to curb restrictive covenants, Assembly Bill 1650, passed through committee on a 6-3 vote, and is now heading to a full vote by the General Assembly.
The new bill is nearly identical to its 2017 predecessor. Both aim to regulate the use of “restrictive covenants,” defined as “an agreement between an employer and an employee arising out of an existing or anticipated employment relationship, or an agreement between an employer and an employee with respect to severance pay, under which the employee or expected employee agrees not to engage in certain specified activities competitive with the employee’s employer after the employment relationship has ended.” (Emphasis added.)
It remains an open question whether provisions outside the parameters of traditional covenants not to compete (such as employee or customer non-solicitation provisions, or non-disclosure provisions) would fall within this statutory definition of “restrictive covenants.” Other sections of the bill, however, suggest that traditional “non-competition” covenants are the only “restrictive covenants” at issue. The bill contains an explicit presumption that “restrictive covenants” are necessary where an employer cannot adequately protect its interests through an “alternative agreement, including . . . an agreement not to solicit or hire employees of the employer; [or] an agreement not to solicit or transact business with customers, clients, referral sources, or vendors of the employer[.]”
As we previously discussed in detail, the bill, if made into law, would impose a host of new regulations on such “restrictive covenants,” including:
- A garden leave requirement, under which an employer must pay most former employees 100 percent of the wages and fringe benefits to which they would otherwise be entitled during the enforcement of a restrictive covenant. There is an exception to the garden leave requirement for employees terminated for “misconduct.” The term “misconduct” is a new concept in this newest iteration of the bill and is discussed in more detail below. Note that if the bill becomes law, New Jersey would become the first state in the country to require garden leave during the enforcement period for a restrictive covenant. (As we previously observed, the Massachusetts Noncompetition Agreement Act, which shares many features with the New Jersey bill, does not actually require garden leave.)
- A prohibition on judicial modification of restrictive covenants that are found to be overly restrictive or otherwise in violation of the law.
- A limitation on the temporal scope of restrictive covenants to one year.
- A limitation on the geographic scope of restrictive covenants to the areas “in which the employee provided services or had a material presence or influence during the two years preceding” separation of employment. There is a qualification that the restrictive covenant “shall not prohibit an employee from seeking employment in other states,” but it’s unclear whether “seeking employment” is intended to be treated the same as engaging in “competition.”
- A prohibition on the enforcement of restrictive covenants for several broad categories of employees, such as:
- Employees classified as nonexempt under the Fair Labor Standards Act;
- Undergraduate or graduate students who intern or engage in short-term employment while they remain enrolled in school;
- Apprentices who meet the applicable federal or state apprenticeship qualifications;
- Seasonal or temporary employees;
- Independent contractors;
- Employees under the age of 18;
- Employees who have been terminated without a determination of misconduct, or have been laid off by the employer;
- “Low-wage” employees, defined as employees whose weekly wage is less than the state-wide average, as determined by the New Jersey Department of Labor and Workforce Development (which under last available data is $1,291.42 per week, equivalent to $67,153.84 per year); and
- Employees whose period of service with the employer is less than one year, making no distinction based on the reason for the separation or whether it was voluntary or involuntary.
- Procedural obligations on employers, such as:
- Disclosure of the restrictive covenant agreement in writing to prospective employees “by the earlier of a formal offer of employment, or 30 business days before the commencement of . . . employment.”
- Disclosure of the restrictive covenant agreement to existing employees at least 30 business days before the effective date.
- An express statement that the employee has the right to consult with counsel before signing a restrictive covenant agreement.
- A ten-day window after separation of employment where the employer must inform most employees if it intends to require compliance with the post-employment restrictions. As with the garden leave requirement, there is an exception discussed below.
Despite being nearly identical, there is one subtle, but material, distinction between the old bill and the new bill.
Under the old bill, restrictive covenants would not be enforceable at all against employees terminated without “good cause,” and if the employee were terminated with “good cause,” then neither the garden leave nor the post-separation ten-day “notice of intent” window would apply for the employer.
Under the new bill, the same carve-outs exist for both employees and employers, but the triggering event is termination with or without a determination of “misconduct,” as opposed to termination with or without “good cause.”
Termination for “good cause” is broader than termination for “misconduct” under the language of the bills. The definition of “good cause,” for example, included poor work habits like inefficiency, working “belatedly and negligently,” or working “in violation of the standards of quality of the establishment.” “Misconduct” is defined under the new bill as “conduct which is improper, intentional, connected with the individual’s work, within the individual’s control, not a good faith error of judgment or discretion, and is either a deliberate refusal, without good cause, to comply with the employer’s lawful and reasonable rules made known to the employee or a deliberate disregard of standards of behavior the employer has a reasonable right to expect, including reasonable safety standards and reasonable standards for a workplace free of drug and substance abuse.”
In short, all of the limitations on and requirements for restrictive covenants contained in the proposed statute would apply if the employee were terminated for narrowly defined “misconduct,” except the garden leave and “notice of intent” provisions. No restrictive covenant would be enforceable against any employee terminated without a determination of “misconduct.” If an employee voluntarily resigns, then the restrictive covenants could be enforceable, with the garden leave and “notice of intent” requirements.
The bill would take effect immediately upon becoming law, but would not apply to any agreement in effect on or before the date of enactment.
We will continue to monitor the progress of Assembly Bill 1650 as it makes its way to the General Assembly floor. In the meantime, New Jersey employers should consider taking proactive steps to protect their legitimate business interests through means that would not be in jeopardy, or be prepared to take prompt and necessary steps to comply if and when the bill were to become law.