Protecting Your Rights And Interests, No Matter The Issue

Is New Jersey Non-Compete Law Enforceable?

by | Dec 19, 2023 | Employment Law |

In New Jersey, non-compete agreements have been a common practice among employers to protect their sensitive business information, such as customer lists and trade secrets, from being shared with competitors. These agreements, when employees sign them, act as a legal barrier to prevent them from engaging in competitive activities immediately after leaving their employment. 

The enforceability of these agreements, a key aspect of New Jersey Non-compete Law, hinges on a critical balance. They must be reasonable in terms of scope, duration, and geographic reach. This reasonableness is determined through careful, fact-sensitive analysis by the courts, ensuring that the agreements don’t overreach and unfairly restrict an employee’s future employment opportunities while still safeguarding the legitimate interests of the employer. 

In New Jersey, the status quo of the non-compete agreement is facing potential changes. Recent legislative proposals aim to introduce more stringent rules for their enforceability, reflecting a growing trend towards balancing employee mobility with business protection. This shift marks a significant moment in the state’s approach to employment contracts. 

Proposed New Jersey Legislation

As an employee in New Jersey, it’s crucial to stay informed about the proposed Non-Compete Law New Jersey looks to implement, specifically regarding non-compete agreements, as these changes could significantly impact your employment contract. The New Jersey Assembly Bill A3715 is proposing several notable revisions to the enforceability of non-compete clauses: 

Scope of Unenforceability: The bill seeks to render non-compete clauses unenforceable against various groups, including independent contractors, employees laid off or terminated for reasons other than misconduct, low-wage employees, student interns, apprentices, employees under the age of 18, and those whose service period is less than a year​​​​.

Duration and Geographic Limitation: The non-compete period would be limited to a maximum of 12 months from the employee’s termination date, and the geographic limitation would be restricted to areas where the employee had a material presence or influence in the last two years prior to termination​​​.

Disclosure and Notification Requirements: Employers would need to disclose the terms of the non-compete agreement in writing at the time of the job offer or at least 30 days before the commencement of employment. Additionally, they must notify the employee in writing of their intent to enforce the non-compete agreement within 10 days of the employee’s termination​​​.

Compensation During Non-Compete Period: Significantly, the employer would be required to pay the employee 100% of their pay and continue their benefits during the post-employment period in which the non-compete clause is effective​.

Specific Cause of Action for Employees: The bill introduces a specific cause of action that allows employees to sue employers who violate these requirements, potentially leading to compensation for lost wages, damages, and attorneys’ fees, with liquidated damages of up to $10,000​.

Restriction on Choice-of-Law Provisions: The bill also aims to restrict choice-of-law provisions in non-compete agreements. If an employee is a New Jersey resident at the time of termination and has been for at least thirty days immediately prior to termination, the non-compete agreement cannot designate a foreign state’s law as governing​. 

It’s important to note that while this legislation proposes significant changes, it is subject to revisions as it progresses through the legislative process and does not apply retroactively. These proposed changes, especially in terms of compensation during the non-compete period and restrictions on enforceability, could set a precedent that other states might follow. 

Overview of the FTC’s Proposed Rule

The Federal Trade Commission (FTC) has proposed a new rule that would effectively prohibit employers from imposing non-compete clauses on their workers. This move is seen as a way to prevent practices that suppress wages, hinder innovation, and limit opportunities for entrepreneurs. The proposed rule is broad and covers not only employees but also independent contractors, interns, and volunteers. 

It aims to restrict any contractual terms that prevent a worker from seeking or accepting employment with another person or operating a business, after the conclusion of their employment with the current employer​. 

There are a few exceptions to this proposed ban. Notably, non-compete clauses related to the sale of a business would still be allowed under certain conditions, such as when the seller has a substantial ownership interest in the business entity being sold. Also, non-compete agreements between franchisees and franchisors are subject to exceptions. 

What Does This Mean for Executives?

The New Jersey Assembly Bill A3715 introduces several other significant changes that would affect executives. 

One major change is the introduction of a de facto “garden leave” provision. This mandates post-employment pay, which obliges an employer to pay the full salary and benefits of a departing employee during the entire non-compete period, even if the employee starts working elsewhere. This differs from traditional garden leave, where an employee is still technically employed but relieved of duties. The bill’s requirement is more stringent, as the employee is completely terminated from the company yet still receives payment​​​. 

Another important aspect of the bill is its impact on geographic restrictions. The bill prevents an employer from prohibiting an employee from seeking employment in other states, creating a loophole for employees working near state borders, such as those in Jersey City. Employees could potentially work for a competitor just across the state line in New York City while still being restricted from similar competition within New Jersey​. 

The bill also curtails the scope of non-solicitation provisions. It prohibits employers from preventing an employee from working with the employer’s customers or clients as long as the employee does not initiate or solicit those customers. This provision could enable employees with established customer relationships to continue working with those customers. 

Are Non-Competes Enforceable? A Guide for New Jersey

New Jersey’s non-compete law is undergoing significant changes with proposed legislation like Assembly Bill A3715. These changes aim to balance employee mobility with business protection, introducing restrictions on enforceability, mandatory compensation, and legal remedies for employees. Alongside the FTC’s proposed nationwide ban, these developments represent a shift towards fairer employment practices, impacting executives and employees alike.

Need to demystify non-compete law in New Jersey? Hamilton Law Firm can help. Contact us for a consultation.