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Volume XII, Number 177

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New Jersey Legislature Continues Efforts to Significantly Limit Restrictive Covenants

On May 2, 2022, the New Jersey State Assembly introduced Assembly Bill (AB) 3715 that, if enacted, would significantly limit the use and enforceability of certain restrictive covenant provisions, while mandating additional procedural requirements. AB 3715 is similar to prior bills introduced in the New Jersey legislature in recent years, and part of the ongoing effort in the Garden State to drastically alter the non-compete landscape. See New Jersey General Assembly to Vote on Renewed Bill Seeking to Curb Restrictive CovenantsNew Jersey Restrictive Covenant Bill Aims to Change the Landscape.

AB 3715 codifies the State’s common-law requirement that a restrictive covenant agreement must be no broader than necessary to protect the employer’s legitimate business interests, must not be unduly burdensome on the employee, and cannot be injurious to the public or inconsistent with public policy.

Significantly, the bill includes multiple additional barriers to traditional restrictive covenants that otherwise may be enforceable under current law. For example, under the bill, a restrictive covenant agreement:

  • must be disclosed to the employee by the earlier of a formal offer of employment or 30 business days before the commencement of employment or, if the agreement is entered into after commencement of employment, must be provided to the employee at least 30 business days before the agreement is to be effective;

  • must be limited to a duration of no more than 12 months following the employee’s termination;

  • must be limited to the geographic area(s) in which the employee provided services, or had a material presence, during the two years preceding the employee’s termination, and cannot prohibit the employee from seeking employment in other states;

  • must be limited to only the specific types of services provided by the employee during the last two years of employment;

  • cannot penalize an employee for defending against or challenging the enforceability of the restrictive covenant(s). The bill is unclear as to whether a restrictive covenant may include a fee-shifting provision in favor of the employer or the prevailing party, where an employer successfully enforces a covenant against a breaching employee;

  • cannot contain a choice of law provision that would have the effect of circumventing the bill’s proscriptions (with limited exceptions); and

  • cannot prevent an employee from providing a service to the employer’s customer or client, if the employee does not initiate or solicit the customer or client. Whether the employee engaged in an “initiation” or “solicitation” – neither of which is defined in the bill – is an issue that likely will be litigated, especially where an employee engages in arguably subtle or passive conduct.

In addition to the above limitations, AB 3715 establishes several categories of employees against whom a restrictive covenant agreement cannot be enforceable, including:

  • an employee who has been terminated without a determination of misconduct;

Under the bill, “misconduct” is defined as “conduct which is improper [and] . . . 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.”

  • non-exempt employees, as defined under the Fair Labor Standards Act;

  • employees under age 18;

  • undergraduate or graduate student interns;

  • seasonal employees, temporary employees, or independent contractors;

  • low-wage employees, defined as an employee whose average weekly earnings are less than the statewide average; and

  • employees employed less than one year.

Additionally, an employer must notify the employee in writing, within 10 days of the employee’s termination, of its intent to enforce a restrictive covenant agreement and must pay the employee 100 percent of the employee’s wages and fringe benefits during the period of enforcement of a restrictive covenant. While these requirements would not apply to terminations for misconduct, they would apply to employee resignations, possibly creating the opportunity for an employee anticipating termination to preemptively resign and invoke application of the notice-and-pay provisions.

Finally, the bill expressly permits an employee to bring a civil action against their employer for alleged violations of the bill’s provisions, within a two-year statute of limitations. The court could then void the agreement and order “all appropriate relief,” including issuing of an injunction against the agreement’s enforcement and awarding of damages and attorneys’ fees.

The Takeaway

As noted above, similar bills have been introduced in recent years, as far back as 2017 and most recently in February 2022, when the New Jersey Senate introduced SB 1410. That bill has made no progress since its introduction and it remains to be seen whether AB 3715 will fare any better. Still, employers should be mindful of this most recent legislative effort, as ultimately it could substantially change how they draft their future restrictive covenant agreements. Jackson Lewis will continue to monitor both AB 3715 and SB 1410 and will report on developments as warranted.

Jackson Lewis P.C. © 2022National Law Review, Volume XII, Number 140
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About this Author

Shane Kagan Employment Lawyer Jackson Lewis Law Firm
Associate

R. Shane Kagan is an Associate in the Morristown, New Jersey, office of Jackson Lewis P.C. His practice focuses on representing employers in workplace law matters, including preventive advice and counsel. While attending law school, Mr. Kagan was an Articles Editor for the Rutgers Law Record, served as Treasurer and Executive Board Member for the Moot Court Board, and participated in the Special Education Clinic, providing pro bono legal services.  He also was a judicial extern for the Honorable Freda L. Wolfson, in the United States District Court for...

973-538-6890
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