New Jersey Bill Would Significantly Limit – And Make Employers Pay For – Non-Compete Agreements

27 June 2022 Labor & Employment Law Perspectives Blog
Author(s): John R. FitzGerald

In early May 2022, New Jersey assemblymen introduced a bill that—if passed—will significantly limit employers’ ability to enter into and enforce employee non-compete agreements.  As such, New Jersey may join the growing list of states with laws aimed at limiting non-compete agreements and similar restrictive covenants.  Other states that have recently joined the list include Illinois and Colorado.  While the specifics of the bill are subject to change as it continues through the legislative process, the draft is worth considering, as it contains some unique measures. 

Perhaps most striking is the fact that the bill caps the non-compete period at twelve months post-termination, and requires employers to provide employees one hundred percent of their rate of pay and fringe benefits throughout the non-compete period unless the employee is terminated for misconduct.  In other words, under the proposed bill, in order to enforce a non-compete, companies would have to pay terminated individuals as if they were still employed.  “Fringe benefits” are defined as “any vacation leave, sick leave, medical insurance plan, disability insurance plan, life insurance plan, pension benefit plan, or any other benefit of economic value, to the extent that the leave, plan, or benefit is paid for in whole or in part by the employer.”  The bill also caps liquidated damages at $10,000.00. 

Another unique feature of the bill is a post-employment notice requirement.  Unless the employee is terminated for engaging in misconduct, the employer must, within ten days after the employee’s termination, notify the employee in writing of the employer’s intent to enforce the agreement.  If the employer does not provide proper notice within this ten-day period, the agreement will be determined void and unenforceable.

In addition to the above, the bill contains several measures that resemble restrictions enacted in other states.  For example, the bill lists nine types of employees against whom a non-compete agreement is unenforceable.  The bill would exempt (1) employees classified as nonexempt under the FLSA, (2) undergraduate or graduate student interns, (3) apprentices participating in programs registered by the Office of Apprenticeship of the U.S. Department of Labor, (4) seasonal or temporary employees, (5) employees who have been terminated without a determination of misconduct, or laid off by action of the employer, (6) independent contractors, (7) employees under the age of 18, (8) employees whose period of service to the employer is less than one year, and (9) low-wage employees, defined as employees with average weekly earnings less than the New Jersey statewide weekly average as determined by the Commissioner of Labor and Workforce Development.  In 2020, the statewide weekly average wage was $1,419.52.

Also, similar to other state laws, the bill includes a notice requirement at the beginning of employment.  An employer must disclose the terms of a non-compete agreement in writing to prospective employees by the earlier of the formal offer of employment, or thirty business days before the commencement of the employee’s employment.  For contracts entered into after employment commences, a similar 30-day notice period applies.  To be valid, the agreement must be signed by the employer and employee and expressly state that the employee has the right to consult with counsel prior to signing.

Also, like some other states, such as Massachusetts, Washington, Colorado, and California, the bill restricts choice-of-law provisions.  If an employee is a resident of New Jersey at the time of termination and has been for at least thirty days immediately prior to the termination, the employee’s non-compete agreement cannot contain a choice-of-law provision identifying a foreign state as the governing law. 

The bill would also codify certain New Jersey common law principles.  Specifically, a non-compete agreement may only prohibit an employee from working in a geographic area wherein the employee had a material presence or influence during the two years that preceded termination.  Agreements also cannot prohibit an employee from seeking employment in other states following termination.  The bill also would codify the common law principle that an agreement is presumed necessary where the legitimate business interest cannot be adequately protected through an alternative agreement.  Examples of alternative agreements include non-solicitation, non-disclosure, and confidentiality agreements.

While the current draft of the bill is subject to change as it moves through New Jersey’s legislative process, employers should be aware of the bill, especially its more innovative restrictions.  These draft provisions may ultimately serve as a model for other states looking to restrict non-compete agreements.  We will continue to monitor New Jersey’s and other states’ non-compete legislation around the country.

This article was prepared with the assistance of 2022 summer associate Nick Covek.

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.

Related Services