A new bill — A.B. 3715 — is making its way through the New Jersey state legislature. Its purpose? To limit employers’ abilities to enforce noncompete and non-solicitation agreements.
If it passes without further modification, it requires NJ employers to “pay the employee an amount equal to 100% of the pay [to] which the employee would have been entitled for work that would have been performed” — plus any fringe benefits — while the restrictive covenants remain in place.
The Bill’s Provisions
This bill carries significant implications for the state’s employers in its current form.
- It does not allow employers to prohibit former employees from looking for work in other states. Why is the limitation on enforcing the rule that former employees could not seek employment outside of New Jersey cause for concern?
Because of the state’s proximity to New York and Pennsylvania, where competitors might operate. For example, a former NJ employee might find a new job with a competitor ten miles away in New York City even though that same person wouldn’t be able to work for a different competitor the same distance away from their original employer but located in NJ.
- The bill keeps employers from implementing “choice of law” provisions intended to circumvent the bill’s requirements by seeking ways to apply a law from a more favorable jurisdiction.
- It also doesn’t allow employers to restrict former employees from offering services to former clients or customers if the former employee didn’t initiate contact with or solicit the former client or customer. Why would this prohibition be a concern? Because those employees with established client relationships wouldn’t need to initiate contact. They could likely find legal workarounds to continue those relationships without running afoul of the law.
The bill would limit all post-employment noncompete and non-solicitation agreements to one year starting on the employee’s final day of employment regardless of any case-by-case situations that might warrant a longer restriction.
A potential issue that could arise from this provision is that high-level employees could choose to leave just prior to their one-year anniversary to go work for a competitor — with zero contractual restriction. (The bill would still prevent them from sharing their former employer’s trade secrets or intellectual property.)
- The bill requires employers to give details of the restrictive covenant to all new hires if the formal employment offer is extended — or 30 days prior to a new employee’s start date. Also, employers would need to share details of the proposed restrictive covenant with current employees (in writing) at least 30 days before it takes effect.
- Additional requirements include employers needing to give written notice of their intent to enforce the restrictive covenant to former employees within 10 days of their departure. Otherwise, the agreement is considered void. And employees would gain more legal support should they choose to bring action against their former employer for violating the bill’s requirements. Beyond voiding employee agreements in violation of the bill, courts could also award employees attorney fees, damages, and lost compensation up to $10,000.
- And finally, for the time a restrictive covenant remains in effect, employers would be held responsible for paying former employees 100% of their previous compensation and continue all contributions toward other benefits — like health insurance and retirement funds.
Which Types of Workers Are Affected?
The proposed bill would make restrictive covenants unenforceable against a wide range of workers including employees who’d worked for the employer for fewer than 12 months, with no restrictions based on their experience, compensation, knowledge, or skillset. Other employees falling within the category include:
- Employees laid off/terminated for any reason other than misconduct
- Employees under the age of 18
- Independent contractors
- Low-wage employees
- Nonexempt employees under the federal Fair Labor Standards Act
- Temporary and seasonal workers
- Undergraduate and graduate student interns
Should this bill become law, current NJ common-law limitations would be codified to require that the restrictive covenant act in accordance with public policy, not impose hardship on employees based on duration or geography, nor be greater than necessary to protect an employer’s legitimate interests. The bill also voids “no-poach” agreements between competitors who might otherwise attempt to approach and solicit each other’s employees.
How to Prepare
The NJ Assembly Labor Committee voted in favor of A.B. 3715 in May 2022; however, it has not yet become law. Should it pass either in its current form or with modifications, it will alter the landscape of how all NJ businesses use restrictive covenant agreements to protect themselves and their customer and client relationships.
Any company using restrictive covenant agreements will need to review them to ensure they align with the new law — and take steps to update their agreements so they are protected. As this bill makes its way through the state’s legislative process, NJ employers should consult with their legal teams to review their current use of restrictive covenants.
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