New Jersey Legislature Continues Efforts to Significantly Limit Restrictive Covenants | Jackson Lewis CP

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On May 2, 2022, the New Jersey State Assembly introduced Assembly Bill (AB) 3715 which, if passed, would significantly limit the use and enforceability of certain covenants , while imposing additional procedural requirements. AB 3715 is similar to earlier bills introduced in the New Jersey legislature in recent years and is part of ongoing efforts in the Garden State to dramatically change the non-competition landscape. To see New Jersey General Assembly to Vote on Renewed Bill to Reduce Covenants; New Jersey’s restrictive covenants bill aims to change the landscape.

AB 3715 codifies the state’s common law requirement that a restrictive covenant agreement must not be broader than necessary to protect the legitimate business interests of the employer, must not be unduly burdensome on the employee, and cannot be harmful to the public or incompatible with public order.

Significantly, the bill includes multiple additional hurdles to traditional covenants that might otherwise be enforceable under current law. For example, under the bill, a restrictive covenant:

  • must be disclosed to the employee at the earliest of a formal offer of employment or 30 working days prior to commencement of employment or, if agreement is reached after the beginning of the employment, must be provided to the employee at least 30 working days before the entry into force of the agreement;
  • must be limited to a period not exceeding 12 months after the termination of the employee’s employment;
  • must be limited to the geographic area(s) in which the employee provided services or had a physical presence during the two years prior to the employee’s termination, and cannot prohibit the employee from seeking employment in other states;
  • must be limited to only the specific types of services provided by the employee during the last two years of employment;
  • cannot penalize an employee for defending or challenging the enforceability of the restrictive covenant(s). The bill is unclear as to whether a restrictive covenant can include a provision to transfer fees in favor of the employer or prevailing party, where an employer successfully enforces a covenant against an employee. in infraction ;
  • may not contain a choice of law provision that would have the effect of circumventing the prohibitions of the Bill (with limited exceptions); and
  • cannot prevent an employee from providing service to the client or client of the employer, if he does not initiate or solicit the client or client. Whether the employee engaged in “initiation” or “solicitation” – neither of which is defined in the bill – is a matter that will likely be the subject of litigation, in particularly when an employee engages in conduct that is arguably subtle or passive.

In addition to the above limitations, AB 3715 establishes several categories of employees against whom a restrictive covenant agreement cannot be enforceable, including:

  • a fired employee without determination of misconduct;

Under the bill, “misconduct” is defined as “inappropriate conduct [and] . . . not an error in good faith judgment or discretion, and constitutes either a willful refusal, without cause, to comply with the legal and reasonable rules of the employer brought to the notice of the employee, or a willful disregard of the standards behavior that the employer has a reasonable right to expect.”

  • non-exempt employees, as defined in the Fair Labor Standards Act;
  • employees under the age of 18;
  • undergraduate or graduate student interns;
  • seasonal employees, temporary employees or independent contractors;
  • low-wage employees, defined as an employee whose average weekly earnings are below the state average; and
  • employees employed for less than one year.

In addition, an employer must notify the employee in writing, within 10 days of the employee’s termination, of its intention to enforce a restrictive covenant and must pay the employee 100% of the wages and benefits of the employee during the period of application of a restrictive covenant. commitment. While these requirements do not apply to terminations for misconduct, they would apply to employee resignations, potentially creating the ability for an employee anticipating termination to preemptively resign and invoke the application of notice provisions. and remuneration.

Finally, the bill expressly allows an employee to bring a civil action against his employer for alleged violation of the provisions of the bill, within a limitation period of two years. The court could then set aside the agreement and order “all appropriate remedies”, including issuing an injunction against performance of the agreement and awarding damages and attorneys’ fees.

Takeaway meals

As noted above, similar bills have been introduced in recent years, as early as 2017 and most recently in February 2022, when the New Jersey Senate introduced SB 1410. This bill has made no progress since. its introduction and it remains to be seen if AB 3715 will fare any better. Nonetheless, employers should keep this most recent legislative effort in mind, as it could ultimately significantly change the way they draft their future restrictive covenants. Jackson Lewis will continue to monitor both AB 3715 and SB 1410 and report on developments as appropriate.

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