On behalf of our member companies that make NJBIA the largest statewide business association in the nation, I write to you in opposition of Senate Bill No. 1410 (Cryan/Johnson), which severely limits the provisions and enforceability of restrictive covenants, such as non-compete, non-solicitation, and non-disclosure agreements.
As we try to reclaim New Jersey’s status as an innovation state and encourage new startups and increase patents, this legislation runs counter to those goals. It places limits on restrictive covenants, including those that are vital to protect the legitimate interests of businesses, such as protections of trade secrets, proprietary information and solicitation of customers. This legislation would make New Jersey an outlier even among other states that have taken various actions in this space through the extreme garden leave provisions which require employers to pay full salary and benefits to an employee while a restrictive covenant is in place as well as limiting non-solicitation and non-disclosure agreements. Below is an outline of our detailed concerns with this legislation.
Exceeds protecting low-income workers: This legislation goes far beyond just protecting low-income workers who logically should not be bound by many post-employment restrictions. This bill would limit the ability of employers to place post-employment restrictions on higher income earners who may know intimate details about business operations. Higher income earners often have the most leverage when moving between jobs and are offered long-term incentives or other bonus agreements. Courts generally handle litigation regarding restrictive covenants by adequately adjudicating the best way to protect the employer and the employee should a conflict arise using what’s commonly referred to as the blue pencil doctrine. This allows the courts to strike any provision that goes beyond what is necessary to protect legitimate business interests while keeping other provisions intact. When assessing restrictive covenants that can be placed on higher wage earners, employers should have the ability to impose reasonable time and geographic scope restrictions that protect employers and do not severely hinder employees.
- We suggest substituting the bill to cover post-employment, non-competition restrictions only for low-income employees as defined as an employee whose average weekly pay including bonuses, commissions and any other payments calculated by dividing the employee’s pay during the period of 12 calendar months immediately preceding the date of termination of the employee’s employment with the business by 52 or by the number of weeks that the employee was actually paid during the 52-week period, is less than the Statewide average weekly remuneration as determined pursuant to R.S. 43:21-3(c)(3). This definition would cover all employees making roughly less than $70,000 without benefits and would adjust annually as the statewide average wage changes.
- We also suggest ensuring the bill is clarified to allow employers to place appropriate restrictive covenants, such as non-disclosure and non-solicitation agreements, which protect proprietary information on all employees and independent contractors when necessary.
Limitations on when restrictive covenants can be in place: The proposed legislation makes restrictive covenants unenforceable for employees who have worked for less than a year for their employer. An employee who works less than a year still has enough time to become familiar with business practices and sensitive information. This arbitrary time frames will not allow employers to adequately protect trade secrets and proprietary information.
Limitations on restrictive covenants for independent contractors: Independent contractors by definition run their own business operation while working for another business. This legislation would limit the ability to put a restrictive covenant in place to protect a business while hiring an independent contractor to complete very specific work.
The Federal FLSA definition of non-exempt is broad: The provision of this legislation that states restrictive covenants are not enforceable if an employee is considered non-exempt under the federal Fair Labor Standards Act is broad. Non-exempt workers encompass more than just the minimum wage worker that often comes to mind and can include a broader range of professionals. This standard would make restrictive covenants unenforceable even for some highly competitive, well-paid positions such as certain types of nonexempt salesperson. As previously mentioned, we suggest relying on state statute to exclude low-wage workers from post-employment restrictions rather than relying on the broader FLSA nonexempt definition.
Extreme position on garden pay: Additionally, this bill has unreasonable and overly burdensome garden pay provisions that will force employers to pay full salary and benefits during the time that a restrictive covenant is being enforced. This language does not take into consideration that many employees subject to non-competes are high-level employees who enter into these sophisticated arrangements that include significant severance and incentive packages in exchange for signing a non-compete agreement. Nevertheless, employers will be forced to pay a former employee for up to 12 months even if that employee negotiated a robust severance package or found another job. Since garden leave is required so long as an employee is not terminated for cause, employees would be incentivized to resign from their positions in order to receive a free year of compensation and benefits. Lastly, the language regarding garden leave in this legislation is not clear on exactly what types of restrictive covenants would trigger garden leave.
Concerns regarding limitation on non-solicitation agreements: This bill states that an employee shall not be restricted from providing a service to a customer or client of a former employer if the employee does not initiate or solicit the customer or client. In today’s digital age, the line of solicitation can be easily blurred. For example, if a former employee posts about their new role on a social media platform and encourages their followers to reach out to them, former customers or clients could respond for services. This may not be considered a direct initiation or solicitation but will result in harm to their former employer. As another example, an employer can have a Director of Sales who had a close working relationship with a particular customer of the employer, and the employee made that connection through the workplace. This employee can leave and work for a direct competitor and receive an unknowing phone call from the former customer. This employee should not be able to solicit that customer for products or services of the new employer.
Geographic limitations on out-of-state employment: The prohibition on restricting employees from seeking employment out-of-state as currently written in the bill does not make sense for New Jersey. In a state like ours, where many residents reside close to our neighboring states, geographic limitations are feasible and necessary to protect the legitimate business interests of an employer. For example, if a business owner in Trenton wants to place a post-employment restriction on an employee, but they were not allowed to limit them seeking employment out of state, that employee could work at a competitor business in Pennsylvania that is just minutes away from their previous employer. Geographical limitations should be able to include employment in other states if it is within a reasonable radius of the employer.
12-month cap on length of restrictive covenants: This legislation creates a 12-month cap on how long a restrictive covenant can be in place. This may make sense for some restrictive covenants, but others may need longer or indefinite time frames to protect employers from the disclosure of trade secrets or proprietary information.
10-day notice requirement following termination of employment is too short: The bill provides that, not later than 10 days after the termination of an employment relationship, the employer must notify the employee in writing of the employer’s intent to enforce an agreement. If the employer fails to provide notice, the agreement is void. Employers may not even be aware of who the former employees’ new employer is in this time frame. This provision provides an unrealistic, short window in which an employer must decide if it is necessary to enforce a restrictive covenant.
Ambiguous definition of restrictive covenant: The broad definition of restrictive covenant in this legislation would have the impact of severely limiting and banning many types of agreements such as non-solicitation and non-disclosure agreements, not just non-competition agreements. This sweeping definition would make this legislation the most extreme bill in the nation.
Concerning private right of action, liquidated damages, and attorneys’ fees provisions: This bill includes several legal remedies that are extremely troublesome for the business community. The inclusion of a private right of action often leads to costly lawsuits with little merit against employers, even for minor, inadvertent paperwork violations. The bill also provides for liquidated damages and attorneys’ fees which will encourage class action suits with the goal of large payouts. On top of this, employees who are subject to a restrictive covenant have two years to bring action against any employer or person who has violated a provision of the bill. This time frame coupled with the extensive legal remedies mentioned above will drive up the cost of doing business in our state.
Overall business climate implications: If signed into law, this legislation will add to our state’s reputation of being an unfriendly place to do business. This legislation could result in employers changing their choice of law and venue from New Jersey to other, more friendly and predictable states. Once venue and choice of law are no longer New Jersey for corporations, it will add another reason for national companies to move away from our state, taking thousands of jobs with them.
