On November 9, 2017, The New Jersey Senate introduced Senate Bill 3518, which would constrain restrictive covenants or non-compete agreements with employees. A non-compete is a contract in which an employee promises not to take a job with a competitor for a certain period of time after the employment relationship ends or “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.”
If this bill is passed, SB 3518 would enforce major restrictions and limitations on an employer’s ability to conform restrictive covenants against employees.
Legitimate Business Interest
The bill states, the agreement should not be broader than necessary to protect the legitimate business interests of the employer, including the employer’s trade secrets or other confidential information that would not otherwise qualify as a trade secret, including sales information, business strategies and plans, customer information, and price information. This bill is explaining that if the employee does not pose a competition threat against the employer there is no reason for a strict non-compete agreement. SB 3518 requires the restrictive covenant to be personalized to protect the “legitimate business interest.” This standard would apply to the types of activities restricted, the duration of the restrictions, and the geographic area of the restrictions. The duration of SB 3518 prohibits restrictive covenants lasting more than one year.
Restrictive covenants geographic range generally must not restrict competition outside the areas “in which the employee provided services or had material presence or influence during the two year preceding.” An employer may require or request that an employee enter into a restrictive covenant as a condition of employment or with respect to severance pay as provided in this act. A restrictive covenant is enforceable to the extent that it meets the following requirements:
- If the agreement is entered into in connection with the commencement of employment, the employer shall disclose the terms of the agreement in writing to the prospective employee by the earlier of a formal offer of employment, or 30 business days before the commencement of the employee’s employment or, if the agreement is entered into after commencement of employment, the employer must provide the agreement at least 30 business days before the agreement is to be effective. The agreement shall be signed by the employer and the employee and expressly state that the employee has the right to consult with counsel prior to signing.
- The agreement shall not be broader than necessary to protect the legitimate business interests of the employer, including the employer’s trade secrets or other confidential information that would not otherwise qualify as a trade secret, including sales information, business strategies and plans, customer information, and price information. An agreement may be presumed necessary where the legitimate business interest cannot be adequately protected through an alternative agreement, including but not limited to: an agreement not to solicit or hire employees of the employer; an agreement not to solicit or transact business with customers, clients, referral sources, or vendors of the employer; or a nondisclosure or confidentiality agreement.
- The agreement may restrict the employee’s engaging in activities competitive with the employee’s former employer for a period not to exceed 12 months following the date of termination of employment.
- The agreement shall be reasonable in geographical reach and limited to the geographic areas in which the employee provided services or had a material presence or influence during the two years preceding the date of termination of employment, and shall not prohibit an employee from seeking employment in other states.
- The agreement shall be reasonable in the scope of proscribed activities in relation to the interests protected and limited to only the specific types of services provided by the employee at any time during the last two years of employment.
- The agreement shall not penalize an employee for defending against or challenging the validity or enforceability of the covenant.
- The agreement shall not contain a choice of law provision that would have the effect of avoiding the requirements of this section, if the employee is a resident of or employed in the State at the time of termination of employment and has been for at least 30 days immediately preceding the employee’s termination of employment.
- The agreement shall not waive an employee’s substantive, procedural and remedial rights provided under this act, any other act or administrative regulation, or under the common law.
- The agreement shall not restrict an employee from providing a service to a customer or client of the employer, if the employee does not initiate or solicit the customer or client.
- The agreement shall not be unduly burdensome on the employee, injurious to the public, or inconsistent with public policy.
Restrictive Covenants are banned against certain types of Employees. An agreement made under this act shall not be enforceable against:
- an employee who is classified as nonexempt under the federal “Fair Labor Standards Act of 1938” (29 U.S.C. s.201 et seq.);
- an undergraduate or graduate student that undertakes an internship or otherwise enters into a short-term employment relationship with an employer, whether paid or unpaid, while enrolled in a full-time or part-time undergraduate or graduate educational institution;
- an apprentice participating in an apprenticeship program registered by the Office of Apprenticeship of the U.S. Department of Labor and meeting the standards established by the office, or registered by a State apprenticeship agency recognized by the office;
- a seasonal or temporary employee;
- an employee that has been terminated without good cause or laid off by action of the employer;
- an independent contractor;
- an employee under the age of 18;
- a low-wage employee; or
- an employee whose period of service to an employer is less than one year.
Not later than 10 days after the termination of an employment relationship, the employer shall notify the employee in writing of the employer’s intent to enforce the agreement. If the employer fails to provide that notice, the agreement shall be void. This subsection shall not apply if the employee has been terminated for good cause.
During any period after the employment relationship has ended and a covenant under this section is effective, the employer shall pay the employee an amount equal to 100 percent of the pay which the employee would have been entitled for work that would have been performed during the period prescribed under this section, and continues to make whatever benefit contributions would be required in order to maintain the fringe benefits to which the employee would have been entitled for work that would have been performed during the period prescribed under this section. A covenant shall not permit an employer to individually discontinue or otherwise fail or refuse to make the payments except in the event of a breach by the employee. This subsection shall not apply if the employee has been terminated for good cause.
Any provision of an agreement established under this section shall be, to the extent it conflicts with this section, void and unenforceable.
Garden Pay and Good Cause
Garden pay and good cause are requirements under SB 3518. If an employer requires a former employee to comply with his or her restrictive covenants, it must continue paying or providing 100 percent of the wages and fringe benefits that the employee would have been entitled to receive had the separation of employment not occurred. Good cause is “a reasonable basis related to an individual employee for termination of the employee’s employment in view of relevant factors and circumstances”. Restrictive covenants are unenforceable against any employee who have been terminated without good cause.
It is too early to tell if the bill will be passed but SB 3518 requests to limit the use of restrictive covenant agreements in several ways. This will constraint the use of restrictive covenants by categories of employees and striking procedural and monetary responsibilities.