NJ Restrictive Covenant Law: What Employers and Employees Need to Know

I recently attended a seminar focused on the status of restrictive covenants in New Jersey. With the potential for the current law changing, I thought it was important to share exactly what those covenants are, whether they will hold up on court, and how a pair of pending bills - Senate Bill S4385 and A5708 in the prior session, now carried forward as S1407 in the current 222nd Legislature - could fundamentally change the rules for employers and workers.

If you have signed one of these agreements, been asked to sign one, or drafted them for employees, what’s happening in Trenton deserves your attention.

What Is a Restrictive Covenant

The most common employment restriction is a “non-compete agreement”, but that is actually only one type of restrictive covenant. These covenants are contractual provisions that may be standalone documents or included inside offer letters or onboarding packets when someone starts a new job. In essence, they place legal limits on what a worker can do during and after leaving a job. While they all fall under the same umbrella, they are not treated the same way under New Jersey law.

Non-Compete Agreements

A non-compete agreement restricts a departing worker from taking a job at a competing business or starting their own competing business for a defined period of time after the employment ends. These agreements are the most contested type of restrictive covenant and are the focus of the pending legislation.

Non-Solicitation Agreements

A non-solicitation agreement prevents an employee from reaching out to the employer’s clients or customers to take their business to a new company. This can apply even if the customer reached out to the employee depending upon how the clause is written.

No-Poach Agreements

While the two restrictive covenants above relate to employer-employee, a no-poach agreement is usually between two businesses, often in the same industry or between a business and a staffing agency. An employee may not even know that these agreements exist. The pending legislation would void such agreements.

Confidentiality Agreements and NDAs

These agreements, which are often referred to interchangeably, prohibit an employee from sharing proprietary company information - such as client data, pricing strategies, internal processes, and business plans (commonly known as “trade secrets”) - with anyone outside the organization both during and after employment. Because this type of restrictive covenant does not interfere with employment, it is rarely thrown out by the courts.

Trade Secret Agreements

The New Jersey Trade Secrets Act (NJTSA) defines a trade secret as information that has independent economic value from not being generally known and that the owner takes reasonable steps to be confidential. This typically refers to things like proprietary formulas, manufacturing processes, software code, customer databases, etc. A trade secret covenant formalizes the employee’s obligation not to misuse that information. There also is a federal trade secrets act, formally known as the Defense Trade Secrets Act (DTSA).

How New Jersey Law Currently Treats Non-Compete Agreements

Currently, New Jersey does not yet have a statute governing non-compete agreements, so the law has developed case by case over decades. The governing framework comes from a case called Solari Industries, Inc. v Malady. Under what is commonly referred to as the Solari test, a non-compete agreement is only enforceable if all three of the following conditions are met:

1. The agreement protects a genuine business interest

2. The restrictions don’t unreasonably burden the employee

3. The agreement doesn’t harm the public

If a judge finds that a non-compete is unreasonably overbroad, they can rewrite it rather than completely void it; however, if it determines that the employer intentionally drafted the agreement knowing it was overreaching, the entire agreement may be thrown out.

Does Getting Fired Void a Non-Compete Agreement?

Unlike some other states, in New Jersey, a non-compete is not automatically voided because the employee was fired, but the firing is considered when weighing whether the restriction creates undue hardship on the employee.

How S4385/A5708 and S1407 May Impact Current Restrictive Covenant Case Law

The current pending legislation, would generally:

●      Prohibit non-compete agreements after the effective date for all workers

●      Restrict the time and geographic reach of enforceable existing non-compete agreements

●      In certain cases require compensation for the restricted time for existing enforceable agreements

●      Create narrow exceptions for senior executives for enforceable agreements

●      Ban no poach agreements

The proposed legislation casts a wide net in direction and timeline for existing non-compete agreements. Most workers currently bound by non-competes would no longer be held to them, and employers would simultaneously lose the ability to impose new ones. The only carve-out - and it is narrow - applies to senior executives, defined as an individual in a “policy-making position” who earned at least $151,164 in the previous year.

Any existing non-compete agreement with an executive in place before the new law’s effective date would only be enforceable if it meets the following 12 requirements:

●      The employer discloses the terms of the non-compete clause in writing to the worker not more than 30 business days after the law’s effective date, and if it was revised pursuant to the new law it must be signed by the employer and employee and the disclosure must state that the employee can seek counsel before signing

●      The clause is not broader than necessary to protect legitimate business interests

●      The restricted period cannot be longer than 12 months after termination

●      The restriction must be reasonable in geographic reach

●      The restriction must be limited to services the employee provided in the last two years of employment

●      The clause can not penalize an employee for defending against or challenging its validity or enforceability

●      The clause shall not contain a choice of law provision that would have the effect of avoiding the requirements of the law

●      The clause cannot waive the employee’s substantive, procedural, and remedial rights provided under this act, any other act, or common law

●      The clause cannot restrict an employee from providing a service to a customer or client of the employer, if the worker does not initiate or solicit the customer or client

●      The clause cannot be unduly burdensome on the employee, injurious to the public, or inconsistent with public policy

●      The clause must state that it will be void if the employer does not provide written notice to the employee of the intent to enforce the non-compete clause within 10 days after termination

●      The clause must provide that during any period after the employment relationship ends in which the employee is prevented from engaging in work or taking employment because of restrictions imposed by the clause, the employer - unless the employee is terminated for misconduct or there is a breach by the employee - shall pay the employee an amount equal to 100 percent of the pay to which the employee would be entitled for the work during that period

Additionally, employers would be required to notify employees within 30 days of the law’s effective date that their non-compete agreements are no longer valid.

The pending law does not impact confidentiality agreements/NDAs, trade secret agreements, or non-solictiation agreements.

What To Do Now

For employers, now is the time to review every restrictive covenant currently in use and determine if the protections can be secured through other agreements or clauses. You should also consult a qualified employment lawyer before asking anyone to sign any covenants.

For employees, seek the advice of counsel before signing any restrictive covenant agreements or clauses.