New Jersey employees may soon find new freedom in the job market. On October 3, 2022, the New Jersey State Assembly held a hearing on Bill No. 3715, backed by the National Employment Lawyers Association of New Jersey (“NELA NJ”). If passed, the Bill would prevent employers from placing unreasonable limits on their workers when they leave for new employment. For New Jersey employees, this would mean more transparency in employment contracts and fewer restrictions on their ability to seek competitive employment opportunities.
Restrictive covenants, more commonly known as “non-competes,” allow employers to prevent skilled employees from seeking new employment opportunities using the skills and knowledge they rely on in their current employment. Some restrictive covenants, such as trade secret and non-solicitation agreements, are critical to a business’ survival, and would still be permitted under the new Bill. While they can serve a valuable purpose to employers, they can be easily abused to limit employment prospects for employees who want to leave a company.
Assembly Bill (No.3715), first introduced in May 2022, addresses how restrictive covenants in employment contracts and severance agreements “discourage innovation and production” by driving skilled workers to other states and “impede the development of business.” More significantly, non-competes place an undue burden on skilled employees that limit their employment.
The Bill allows employers to require employees to enter into restrictive covenants that are enforceable if they meet certain conditions. The first requirement states the terms of an agreement must be disclosed at least thirty days before an employee is bound to it and must expressly state the right to consult with an attorney before signing. The second requirement limits restrictive covenants to “not be broader than necessary to protect the legitimate business interests of the employer,” such as trade secrets and non-solicitation.
The bill also prevents an employer from imposing a restrictive covenant to limit an employee’s competitive activity beyond twelve (12) months after termination and the restriction’s geographical reach to areas where the employee had presence or influence during the two (2) years before termination. Moreover, the scope of the activities limited in restrictive covenants must be narrowed to specific types of service the employee provided during the last two years of employment. The bill goes further to support employees subject to a non-compete but requiring that an employer must pay an employee one hundred percent of their rate of pay and benefits throughout the twelve (12) month non-compete period unless the employee is terminated for misconduct. The bill also prevents employers from punishing an employee who challenges the validity of the restrictive covenants, rendering such agreements void, and protects the employee’s right to bring a legal action against the employer.
The bill would also make restrictive covenants unenforceable against employees who worked for the employer for less than a year, were laid off, are low-wage, or are independent contractors. Such employees are inherently more vulnerable to a difficult job market and may have less ability to travel to find work. The employer is also required to notify an employee in writing of the employer’s intent to enforce a non-compete agreement within ten (10) days of termination, otherwise rendering the agreement void. This and the requirement to notify a job applicant of the non-compete in advance of signing would give some of the bargaining power back to the employee before they sign and are bound to a term that may limit or harm their future job prospects.
Alan Schorr, Esq., legislative liaison of the National Employment Lawyers Association of New Jersey, testified before the Assembly that limiting non-competes helps everyone from employees to employers to customers to New Jersey Tax Payers. Mr. Schorr explained how employees would not be forced to seek employment in other states, employers would not lose strong candidates who are forced to leave for other states or whom they must fire to prevent litigation from the previous employer. Additionally, customers could continue to rely on service providers they trust who move to a competing business, and the New Jersey Taxpayer would not be burdened with supporting unemployed citizens who would be employed but for a non-compete agreement.
“Non-competes are not necessary to protect trade secrets . . . [or] client lists . . .” Mr Schorr testified, “The only thing that non-competes do is prevent competition, unfairly reduce wages, and harm New Jersey’s ability to attract and keep innovative business and employees.”
The bill has the potential to drastically curtail the use of non-competes and give New Jersey employees more freedom and bargaining power in seeking employment. New Jersey joins a wave of other states who have implemented non-compete limits or full bans. Job switching tends to result in higher wages for the employee, and could thus raise wages for employees who remain with the employer to keep employees happy. By limiting the power of employers to control employee’s choice of job, the bill could help employees receive higher wages and help employers keep their employees who would otherwise have to leave the area for work.