?New Jersey recently joined a growing number of states that have taken legislative efforts to significantly limit the enforceability of post-employment restrictive covenants, such as noncompete and nonsolicitation agreements.
Notably, if AB 3715 is passed in its current form, New Jersey employers would be required provide former employees with their full pay and fringe benefits while the post-employment restrictions remain in effect. This arrangement is known as “garden leave” in the U.K. and refers to the idea of providing time for the departing employee to tend to a garden.
AB 3715 would add myriad obstacles and procedural steps for employers and thwart efforts to engage in common business practices. What do you need to know about this pending legislation?
Limits to Restrictive Covenants
AB 3715, if passed in current form, would require the following:
- All post-employment noncompete and nonsolicitation agreements would need to be limited to the 12-month period following the employee’s last day of employment, irrespective of individual considerations that would typically justify longer restrictions.
- Employers would need to provide all new hires with the terms of any restrictive covenant in writing when a formal offer of employment is extended or 30 days prior to the employee’s start date. Likewise, employers would need to provide all existing employees with any proposed restrictive covenant at least 30 business days before the agreement is scheduled to go into effect.
- Within 10 days of a departing employee’s last day of work, employers would have to provide written notice of their intent to enforce the restrictive covenant, with the failure to do so rendering the agreement void.
- Employers would need to pay to employees 100 percent of their former compensation and continue employer contributions toward their fringe benefits during the time that any restrictive covenants remain in effect. In other words, employers would need to provide “garden leave” as an express condition to enforcement.
AB 3715 would also prohibit employers from taking the following three actions:
- Restricting former employees from providing services to former customers and clients, so long as the former employee does not solicit the former customer or client.
- Preventing an employee from seeking employment in other states.
- Including “choice of law” provisions designed to avoid the bill’s requirements by attempting to apply the law of a more favorable jurisdiction.
In addition, AB 3715 would impose a blanket prohibition on restrictive covenants entered into by the following workers:
- Nonexempt employees under the federal Fair Labor Standards Act.
- Undergraduate and graduate student interns.
- Apprentices.
- Seasonal and temporary employees.
- Employees who are laid off or terminated for reasons other than misconduct.
- Independent contractors.
- Employees under the age of 18.
- Employees who have worked for the employer for less than one year.
- Low-wage employees.
Further, existing New Jersey common-law limitations would be codified to require that a restrictive covenant:
- Be no greater than necessary to protect the legitimate interest of the employer.
- Impose no undue hardship on the employee in terms of geographic scope or duration.
- Act in accordance with public policy.
Finally, so called “no-poach” agreements — agreements between competitors not to solicit employees from one another — would be declared void under the bill.
Be Prepared
In May 2022, the New Jersey Assembly Labor Committee voted in favor of AB 3715. Whether the bill in current or a modified form will become law remains to be seen. If AB 3715 is enacted in whole or in part, it would drastically alter the utility of using restrictive covenants to protect, among other things, customer and employee relationships.
Insofar as the bill’s requirements “shall not apply to any agreement in effect on or before the date of enactment,” it is recommended that employers review existing restrictive covenant agreements to ensure that they are adequately protected in advance of any further action taken to enact this proposed legislation.
Christopher J. Capone is an attorney with Fisher Phillips in Murray Hill, N.J. © 2022. All rights reserved. Reprinted with permission.
