Quick Hits

• New Jersey legislators have introduced Senate Bill No. 4385 (S4385) (introduced in the Assembly as Assembly Bill No. 5708), which would prohibit most noncompete agreements and void current ones, except for senior executives under specific conditions.
• S4385 requires employers to notify employees within thirty days of its passage that their noncompete agreements are no longer enforceable.
• Another proposed bill, Senate Bill No. 4386 (S4386), aims to ban noncompetes that restrict employees from engaging in any lawful profession post-employment and prohibit employers from requiring repayment of training or immigration costs.

S4385 would prohibit noncompete agreements except under limited circumstances. Notably, S4385 is retroactive and would void the enforcement of current noncompete agreements. There is a limited carve-out that the bill would not ban retroactive enforcement against “Senior Executives.” If the bill goes into effect, employers would have to notify employees within thirty days of its passage that their noncompete agreements are no longer enforceable. No poach agreements would also be outlawed.

The definition of a noncompete would be: “any agreement arising out of an existing or anticipated employment relationship between an employer and a worker, including an agreement regarding severance pay, to establish a term or condition of employment that prohibits the worker from, penalizes a worker for, or functions to prevent or hinder in any way, the worker from seeking or accepting work with a different employer after the employment relationship ends, or operating a business after the employment relationship ends.” The question, of course, becomes, would a nonsolicit or even a nondisclosure agreement still be enforceable, since either type of agreement may arguably hinder an employee from accepting employment with a different employer or starting his or her own business.

“Senior executive” is defined as “a worker who is in a policy-making position with an employer and is paid total compensation of not less than $151,164 during the year immediately preceding the end of employment, or not less than $151,164 when annualized if the worker was employed during only part of the preceding year.” Here the issue will be that many job categories that employers have traditionally had legitimate needs for noncompetes, such as salespeople, may not be considered in a “policy-making position.”

Noncompetes entered into before the effective date of S4385 would only be viable for senior executives if the following criteria are met:

• The employer must provide a written disclosure within thirty days after the effective date of S4385, setting forth the requirements of the law and any revisions to the noncompete agreement that have been made to comply with the bill and any revision must be signed by the employee.
• The noncompete must not be broader than necessary to protect the legitimate interests of employers. A noncompete can be presumed necessary if a nondisclosure agreement, nonsolicitation of customers, and/or a nonsolicitation of employees are not sufficient to protect an employer’s interests. Note that this will be a very difficult test for employers to pass.
• The noncompete can be no longer than twelve months.
• The geographic reach of the noncompete must be limited to the territory where the employee provided services or had a material presence or influence in the two years prior to the termination of employment, and it cannot prohibit the employee from seeking employment outside of New Jersey.
• The noncompete shall be limited to the activities and services provided by the employee during the last two years of his or her employment.
• The noncompete clause cannot penalize the employee for challenging the validity of the noncompete. This is very important because one of the most effective tools an employer has with a noncompete is an attorneys’ fee provision, but now if the employee challenges the validity of the noncompete—which happens in nearly all noncompete litigation—then that will likely be enough to prevent a court from enforcing the attorneys’ fee provision even if the employer prevails.
• No non-New Jersey choice-of-law provision is permitted to attempt to avoid the requirements of S4385.
• The noncompete clause shall not restrict an employee from providing service to a customer or client if the employee is not the one who initiates or solicits the customer or client. This would be a huge carve-out and allow employees to claim they did not solicit, but the customer or client simply reached out to them.
• The noncompete would be void unless the employer gives the employee notice within ten days of the termination of employment of the employer’s intention to enforce the noncompete. This provision does not apply if the employee was discharged for misconduct.
• The employer must pay the employee “garden leave,” including both salary continuation and benefits for the period of the noncompete.

Notably, S4385 does not apply to noncompetes entered into in the sale of a business. Nor does the bill apply to causes of action that accrue prior to the enactment of the bill, meaning any current noncompete litigations are still viable.

The bill also creates a civil cause of action for aggrieved employees, and their potential damages include liquidated damages, compensatory damages, and attorneys’ fees.

Another Senate bill, S4386, would ban noncompetes that prohibit an employee from “engaging in a lawful profession, trade, or business of any kind after the conclusion of the employee’s employment with the employer.” This provision, like the provisions under S4385, would be retroactive. S4386, like S4385, was introduced by Senator Joseph P. Cryan. It is unclear whether S4386 is being viewed as an alternative if S4385 does not pass or is meant to act in tandem with S4385. Notably, S4386 would ban employers from requiring an employee to repay training costs or immigration/visa costs if the employee leaves employment.

With a gubernatorial election in New Jersey this year, there may be a push to pass the legislation before a new governor takes over. Because a number of large New Jersey companies are incorporated in Delaware, switching to a Delaware choice of law provision in noncompete agreements might have been viable, but Delaware has also become less friendly to noncompetes. For now, other than waiting and seeing what happens in the legislature, and potential lobbying efforts, the main thing New Jersey employers may want to consider is whether to bring lawsuits now for violations of noncompetes to preserve the enforcement of existing noncompete agreements, even if S4385 does pass.