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New Jersey Proposes to Drastically Restrict the Use of Non-Compete Agreements

Last month, the New Jersey State Senate introduced Senate Bill 3518 (the “Bill”), which, if passed, will severely restrict the use and enforceability of employee non-compete agreements in the state of New Jersey. Most significantly, the Bill would: (1) prohibit entering or enforcing non-compete agreements with certain groups of employees; (2) require employers to pay full wages, salary, and benefits to employees during their non-compete period: (3) prohibit applying an arbitration provision or other such restriction to non-compete provisions; and (4) allow employees a private right of action for any statutory violation. The passage of the Bill would be a significant departure from current New Jersey law which generally enforces non-compete agreements and other restrictive covenants provided that they are reasonable in scope, protect legitimate business interests, and are not unduly burdensome on the employee or against public policy.

Importantly, however, the Bill would not apply retroactively, meaning that all non-compete agreements entered into prior to the Bill’s effective date would not be subject to any of the Bill’s requirements.

The Bill is comprised of five main sections: (1) a list of individuals with whom employers cannot enter into non-compete agreements; (2) the 10 requirements for drafting an enforceable non-compete agreement; (3) continuing pay and benefits requirements; (4) posting requirements; and (5) private rights of action and damages for aggrieved employees.

  1. Non-Compete Agreements Cannot Be Entered Into With Certain Individuals
    Under the Bill, Employers would be outright prohibited from entering into non-compete agreements with the following types of individuals:
    Employees classified as non-exempt under the Fair Labor Standards Act (FLSA)

    •  Full or part-time students who are interns or short-term employees, whether paid or unpaid
    •  Apprentices in a registered apprenticeship program
    •  Seasonal or temporary employees
    •  Employees terminated without cause or who were laid off
    •  Independent contractors
    •  Employees under 18 years old
    •  Low-wage employees (those whose average weekly wage is less than the State average weekly wage)
    •  Employees whose period of service to the employer is less than one year.
  2. 10 Requirements for Enforceability
    1. Employer Must Provide Written Agreement 30 Days Prior to Enforcement or at Time of Offer: If a non-compete agreement is entered into at the start of employment, the employee must receive the written non-compete agreement with their offer of employment or 30 business days prior to their first day of work. If a non-compete agreement is entered into after the start of employment, the employee must receive the written non-compete agreement 30 days prior to its effective date. Both parties must sign the agreement and the agreement must include language informing the employee of their right to consult with counsel before signing.
    2. Agreement Must be Narrowly Tailored: A non-compete agreement cannot be broader than necessary to protect an employer’s legitimate business interest, which may include trade secrets or other confidential information (such as sales information, business strategies and plans, customer information and price information).
    3.  Time Restriction: The restrictions in a non-compete agreement cannot exceed 12 months in length.
    4. Geographic Scope Restriction: A non-compete agreement cannot restrict an employee from working outside of the State of New Jersey and must be limited to the area in which the employee was employed or had a material presence in the two years prior to termination.
    5. Services Restriction: A non-compete agreement must be limited to the specific types of services the employee provided in the two years prior to termination.
    6. Anti-Retaliation Requirement: A non-compete agreement cannot penalize an employee for challenging the validity or enforceability of the agreement.
    7. No Non-New Jersey Choice of Law Provisions: If the employee is a New Jersey resident or is employed in New Jersey at the time of termination and for the 30 days prior to termination, a non-compete cannot avoid compliance with this Bill by including an alternative choice of law provision.
    8. No Waiver of Rights: A non-compete cannot waive an employee’s substantive, procedural, or remedial rights in any way. This includes a prohibition on arbitration agreements, class action waivers, and other such restrictions.
    9. Restrictions on Non-Solicit Provisions: An employer cannot restrict an employee from providing services to the employer’s customers or clients unless the employee is the one who initiates the solicitation of the customer or client.
    10. Public Policy Requirement: A non-compete cannot be against public policy, injurious to the public, or unduly burdensome on the employee.
  3. Pay and Benefits Continuation
    The Bill also requires employers to inform an employee of its intent to enforce a non-compete agreement within 10 days of the employee’s termination, unless the employee was terminated for good cause. During the non-compete period, the employer would be required to pay the employee 100% of their pay, including wages, salary, regular tips, regular overtime, and non-discretionary commissions and bonuses. Likewise, employees would be entitled to continuation of benefits, including medical, disability, and life insurance, pension, and vacation and sick leave. However, if an employee is terminated for good cause or breaches their obligations under the non-compete agreement, the employee would not be entitled to the continuation of pay and benefits.
  4. Posting Requirements
    The Bill requires employers to post a copy or approved summary of the law in a visible area of the workplace. Failure to do so would result in a warning for the first violation, a fine of $250 for the second violation, and a fine of $1000 for subsequent violations.
  5. Private Right of Action
    Finally, the Bill provides employees with a private right of action against employers who violate the law. The statute of limitations on such claims would be two years from either: (1) when the agreement was signed; (2) when the employee learned of the agreement; (3) the employees termination; or (4) when the employer takes steps to enforce the agreement, whichever is later. An employee would be entitled to recover liquidated damages capped at $10,000, compensatory damages, injunctive relief, and attorneys’ fees and costs.

Stay Tuned for Developments

While this Bill is in its early stages and would still have to pass the full New Jersey Legislature before the governor could potentially sign it in to law, this Bill represents a substantial departure from current New Jersey law and would significantly decrease an employer’s ability to enter into non-compete agreements to protect its confidential information and trade secrets. We will continue to monitor the Bill as it progresses through the New Jersey legislature and will provide additional information as it becomes available.

Copyright © 2017, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Associate

Danielle Thompson is an associate in the Labor and Employment Practice Group in the firm's New York office. She is admitted to the New York Bar and she is fluent in French. 

Education

  • J.D., Columbia Law School, 2016, Harlan Fiske Stone Scholar
  • B.A., University of California, Santa Barbara, 2012, magna cum laude
212- 634- 3038
Sean Kirby, Legal Specialist, Sheppard Mullin, Labor, Employment
Associate

Sean Kirby is an associate in the Labor and Employment Practice Group in the firm's New York Office.

Areas of Practice

Mr. Kirby has experience representing management in a variety of employment-based matters in both judicial and arbitral forums, including disputes relating to discrimination and harassment allegations, breach of restrictive covenants and employment agreements, and wrongful termination.  Mr. Kirby also counsels employers on labor and employment issues, including wage and hour matters, personnel policies and internal investigations. In addition, Mr. Kirby regularly conducts discrimination and harassment prevention trainings.

212-634-3023