NJ Bill Would Limit & Make Employers Pay For Non-Compete Agreements

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.

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