By Christian Moreira, Staff Writer
The New Jersey Legislature is considering Assembly Bill A3715 (the “Bill”), which would significantly limit certain terms in restrictive covenants (also called “non-competes”) as well as limit the enforceability of restrictive covenants, as a whole. The passage of this Bill will not affect any restrictive covenants entered into on the day of or prior to the signing of it into law, but its importance cannot be understated as the enforceability of restrictive covenants in the State of New Jersey has primarily relied on case law. If signed into law, this Bill would establish statutory criteria for how restrictive covenants can be written.
What are Restrictive Covenants?
A restrictive covenant as an agreement between an employer and employee in which the employee or expected employee agrees to not participate in activities competitive to the employer after the employment relationship has ended and often beyond. Prohibited activities can include working for the former employer’s competitor or soliciting the former employer’s customers and clients. Restrictive covenants often impose geographic limitations preventing the employee from engaging in these prohibited activities within a certain radius of their former employer. The seminal case of Solari Industries, Inc., v. Malady established three factors that a restrictive covenant must follow to be reasonable. An enforceable restrictive covenant must: (1) protect the employer’s legitimate interests, (2) not impose undue hardship on the employee, and (3) not be injurious to the public. This decision has governed New Jersey court decisions on the enforceability of restrictive covenants for the past several decades.
How Does the Bill Affect Restrictive Covenants?
The Bill features an extensive set of provisions identifying what an employer may include in a restrictive covenant as well as to what extent they can be enforced. A notable inclusion to the Bill is the codification or formalization of the Solari factors, which can be found throughout the text. Another important provision in the Bill states that a restrictive covenant’s duration may not exceed 12 months following the date of the employee’s termination. This durational limitation is contrasted by binding case law, which is more lenient of restrictive covenants persisting for over a year. One significant case held that two years was an appropriate time for a restrictive covenant, reasoning that this would be enough time for the former employer to train a new employee. The Bill also outlines what constitutes “reasonable geographic reach” for the purposes of a restrictive covenant. Rather than defining a specific “mile measured” radius, the Bill limits the geographic scope to areas where the employee “provided services or had a material presence” in the two years prior to the end of their employment.
The boldest addition to the Bill, however, states that during the restrictive covenant’s duration, the employer must pay the former employee their full salary, including benefits; the employer may unilaterally discontinue payment if the former employee breaches the terms of the restrictive covenant. Former employees terminated for misconduct will not be eligible for these benefits. It is possible that this provision is intended to implicitly reduce the duration of restrictive covenants, as employers are less likely impose lengthy covenants now that they have an economic disincentive. Challenges to this provision on the State Senate floor—and in the courts if this bill becomes law—are probable.
How does this Bill Affect the Enforceability of Restrictive Covenants?
The Bill identifies certain persons whose employers may not enforce a restrictive covenant against them. Upon the passage of this Bill, restrictive covenants will be unenforceable against undergraduate or graduate students who intern or enter into a short-term employment relationship with the employer while enrolled in an educational institution. Restrictive covenants will also be unenforceable against seasonal or temporary employees, minor employees, “low-wage” employees, as well as employees who were terminated absent a finding of misconduct.
An intention of this Bill, if passed, is to embolden people seeking employment. While employment contracts should never be hastily signed, the protections this Bill affords prospective employees might enable them to enter career commitments with greater confidence and less fear of the ramifications arising from a termination. Employers should, as always with a new law, beware.
Staff Writer Christian Moreira is a second year at Seton Hall Law School. He is currently a judicial intern for the Honorable Judge Callahan in Essex County, Criminal Division.