As the Great New Jersey Denizen Yogi Berra Observed, “It’s Déjà Vu All Over Again”: Noncompete Clauses Are Under Fire in New Jersey Once More
The New Jersey legislature is taking another crack at imposing significant limitations on noncompete agreements. Its first effort in this regard, a 2022 Assembly Bill which proposed mandatory notice periods, the statutory exclusion of certain workers from noncompete restrictions, and specific criteria for determining the reasonableness of competitive restrictions, expired without being passed.
Now, three years later, the legislature appears to be trying again, but in a much bigger way. There are now two new bills pending before the state Senate (one of which also has been submitted to the Assembly). Both go much further than the 2022 Assembly bill by prohibiting almost all noncompete clauses and no-poach agreements.
The first of the bills (S4385), if signed into law, immediately would invalidate nearly all existing noncompetes and require employers to notify workers of the invalidation within 30 days of the bill’s passage. Such notice must be delivered in writing (by hand-delivered paper, mail, email, or text) and must explicitly provide — among other stark statements — that, “You may seek or accept a job with any company or any person — even if they compete with (employer name).”
While there are carve-outs to this near total ban on noncompetes in S4385, they are very limited. In particular, the bill allows for noncompete agreements only:
- When a noncompete is the subject of a cause of action that has accrued prior to the effective date of the bill;
- Where the noncompete is entered into pursuant to a “bona fide sale” of the business; and
- If the noncompete agreement is with a senior executive (i.e., a worker who is in a policymaking position and who is paid total compensation of not less than $151,164 per year).
Notably, the senior executive exception also comes with significant limitations and qualifications, including a cap on the duration of the permissible noncompete (no more than 12 months), a narrow geographic scope (restricting competition only in the geographic areas in which the worker actually provided services or had a material presence or influence), and a requirement that the employer pay the senior executive “100 percent” of their pay and fringe benefits for the noncompete period. Further diminishing the practical effect of the exception, the bill also states that any enforceable noncompete with a senior executive shall be “void if the employer does not provide written notice to the worker of the employer’s intent to enforce the noncompete clause within 10 days after the termination of an employment relationship.”
Further contributing to the severity of the proposed bill, S4385 also bans no-poach agreements without exception and creates a private right of action for violations, with remedies such as injunctive relief, liquidated damages, lost compensation, and attorneys’ fees and costs.
Bill S4386 also is sweeping in its scope, making all noncompete and no-poach agreements “void and unenforceable” as “against public policy” with no exceptions. S4386 requires employers to give notice to both their current and former employees within 30 days of the bill’s passage that their noncompete restrictions are unenforceable. The bill further prohibits any contractual term that requires an employee-debtor to pay for a debt to the employer if the debtor’s employment or work relationship with the employer is terminated. And employers cannot impose any contractual term which charges a penalty, fee, or other cost on an employee for terminating the employment relationship, such as a replacement hire or retraining fees.
Regarding enforcement, the proposed bill S4386 creates a private right of individual and class actions for damages that can include injunctive relief, punitive damages, and attorneys’ fees and costs. Additionally, claims may be brought to the Attorney General or the Commissioner of Labor and Workforce Development.
The bills are currently pending before the Senate Labor Committee and are still in their initial stage of the legislative process. Accordingly, it may be some time before either bill is finalized. Even if neither of these bills ultimately is signed into law, it is clear from the fact that they both contain more onerous prohibitions than the 2022 Assembly Bill that noncompetes seem to be increasingly disfavored by some New Jersey legislators. And, while the FTC ban on noncompetes effectively is no longer in play, the issue continues to be a hot topic at the state level. Accordingly, employers in New Jersey and beyond are well-advised to review their restrictive covenants — at least annually — to ensure on-going compliance with the law. In addition, it is always a good idea to consider the many ways, other than noncompete provisions, that an employer can protect their business interests, such as through strong confidentiality and nondisclosure provisions and non-solicitation clauses.
