In general, a restrictive covenant agreement is an agreement between an employer and employee where the employee agrees not to engage in certain specified activities which may be competitive with the employer following the conclusion of the employment relationship. The most common type of restrictive covenant agreement is a non-compete agreement. On November 9, 2017, the New Jersey Senate introduced Senate Bill 3518, which would significantly limit the enforceability of restrictive covenant agreements in the State of New Jersey.
Here are some highlights of the bill. Under the bill, restrictive covenant agreements would not be enforceable against certain types of workers, such as an employee classified as nonexempt under the Fair Labor Standards Act, seasonal or temporary employees, an employee who is terminated without good cause or laid off by the action of an employer, independent contractors, or an employee whose period of service with the employer is less than one year. In addition, restrictive covenant agreements would have to meet ten strict requirements to be enforceable, including but not limited to, the following: if the agreement is entered into in connection with the commencement of employment, the employer must disclose the terms of the agreement in writing to the prospective employee, the agreement must be signed by the employer and the employee, and the agreement must expressly state that the employee has the right to consult with counsel prior to signing; the agreement may not be broader than necessary to protect the legitimate business interests of the employer; the agreement may restrict the employee from engaging in activities competitive with the employer for no more than 12 months following the date of termination of employment; the agreement must not contain a choice of law provision that would have the effect of avoiding the requirements of the bill if the employee is a resident of or employed in the State of New Jersey at the time of termination or has been for at least 30 days immediately preceding the employee’s termination of employment; and the agreement must not restrict an employee from providing service to a customer or client of the employer, if the employee does not initiate or solicit the customer or client.
Furthermore, the bill provides that an employer seeking to enforce a restrictive covenant agreement must notify the employee in writing of its intent to enforce the agreement; otherwise, the agreement is void. Moreover, the bill requires that “during any period after the employment has ended and a covenant is effective, the employer must pay the employee an amount equal to 100 percent of the pay which the employee would have been entitled for work that would have been performed during the period, and continue to make whatever benefit contributions would be required in order to maintain fringe benefits to which the employee would have been entitled for work that would have been performed.”
In short, if enacted, this bill would be a game-changer for employees and employers. For employers, it would obviously be much harder to enforce restrictive covenant agreements. As for employees, they would have increased mobility following the termination of their employment given the bill’s stringent requirements.
If you have any questions regarding this bill or restrictive covenant agreements, please contact the Law Office of Frank A. Custode, LLC.