Last week, the New Jersey Assembly’s Labor Committee passed bill A3715, designed to sharply limit the available provisions, use, and enforceability of restrictive covenants in employment contracts by New Jersey employers. A3715 purports to address the laudable goal of exempting low-wage workers, students, and seasonal and temp workers from post-employment restraints or covenants. But the bill goes much further and, if passed, the new law will effectively end more than 100 years of non-compete use by New Jersey employers.
The first notable pain point for employers is mandatory “garden leave”––an arrangement by which an employer has the option to enhance the enforceability of its restrictive covenants by paying the former employee for the duration of the restraints. A3715 requires garden leave for every employee subject to a non-compete restriction, regardless of level. The bill requires paid garden leave even if the employee resigns and/or obtains new employment.
- Independent Contractors Exempt?
Though restrictive covenants are common in contracts between employers and their independent contractors, A3715 bans enforcement of restrictive covenants against independent contractors.
Though New Jersey courts enforce non-compete agreements longer than one year, A3715 limits the duration of restrictive covenants to 12 months following the date of termination of employment––regardless of any case-specific facts which may warrant a longer period of enforcement.
- “Short-term” Employees Exempt?
The bill bars enforcement of a non-compete agreement against an employee––regardless of level––who leaves an employer within one year. This creates the probability of high-level employees with access to a wide range of future-looking confidential information who depart for a competitor on their 364th day on the job, leaving the former employer with no recourse.
- Geographic Scope Limited?
The bill appears to prevent enforcement of a non-compete if the former employee simply leaves New Jersey. New Jersey’s small size and easy proximity to so many neighboring states make this provision especially problematic.
- Waiver of Enforcement Rights?
Though employers routinely file enforcement litigation in the non-compete space shortly after the former employee leaves, A3715 forces employers to sue within 10 days or forever lose that right. That surely will create the unintended consequence of discouraging employers from taking a thoughtful and measured approach to enforcement actions. Instead, employers must (and will) file more lawsuits for no reason other than to preserve their rights, even if litigation is not the preferred course of action.
- Elimination of the “Blue Pencil”?
New Jersey has long recognized the “blue pencil” doctrine, by which a reviewing court can judicially modify or revise an overbroad or impractical restrictive covenant. A3715 eliminates a court’s ability to judicially modify an agreement to fairly effectuate the parties’ intent.
- Non-Solicitation Limited?
A3715 goes beyond limiting non-compete agreements and also shrinks employers’ protection from former employees who perform services for customers of their former employer. Specifically, the bill allows a former employee to work with and service customers of their former employer so long as the customer reaches out to the employee first.
- A New Cause of Action against Employers?
Besides limiting the utility and enforceability of restrictive covenants, the bill takes the extraordinary step of creating a brand new cause of action against an employer that violates A3715. This includes a liquidated damages provision and entitlement to reasonable attorneys’ fees and costs for even a technical violation of the myriad restrictions to the language and scope of any restrictive covenant––and even absent actual damages to a former employee.
Employers’ Bottom Line: If passed in its current form, A3715 essentially guts the use of non-compete and customer non-solicitation agreements in New Jersey. The bill goes far beyond the prophylactic measures of our neighboring states, creates significant economic uncertainty, and will surely affect New Jersey’s ability to compete. We will be watching this bill closely as it progresses through the Legislature.
If you have any questions regarding this Alert, please contact the author, Mark A. Saloman, partner in our Berkeley Heights office and Co-Chair of FordHarrison's Non-Compete, Trade Secrets and Business Litigation practice group at msaloman@fordharrison.com.