New Jersey-2018-S635-Introduced

An Act limiting certain provisions in restrictive covenants and supplementing Title 34 of the Revised Statutes.

Be It Enacted by the Senate and General Assembly of the State of New Jersey:

1. The Legislature finds and declares that:

a. Post-employment contracts and severance agreements that restrict or prohibit competition, also known as "restrictive covenants," "covenants not to compete," or "non-compete agreements," impede the development of business in the State by driving skilled workers to other jurisdictions and by requiring businesses to solicit skilled workers from out-of-State.

b. These contracts and agreements discourage innovation and production, impose special hardships on employees and specialized professionals who are trained to perform specific jobs, and may constitute restraint of trade and commerce.

c. Limiting severance agreements will stimulate New Jersey's economy by preserving and providing jobs and by providing opportunities for employees to establish new business ventures and new job opportunities in the State.

2. As used in this act:

"Employee" means an individual who works for hire, including an individual employed in a supervisory, managerial, or confidential position.

"Employer" means any person, corporation, partnership, individual proprietorship, joint venture, firm, company or other similar legal entity, which employs one or more employees, and shall include the State and its instrumentalities and political subdivisions, public corporations, and charitable organizations.

"Fringe benefit" means any vacation leave, sick leave, medical insurance plan, disability insurance plan, life insurance plan, pension benefit plan, or any other benefit of economic value, to the extent that the leave, plan, or benefit is paid for in whole or in part by the employer.

"Good cause" means a reasonable basis related to an individual employee for termination of the employee's employment in view of relevant factors and circumstances, which may include:

(1) the employee engaging in a pattern of improper or disorderly conduct;

(2) not working in an efficient manner, or working belatedly and negligently, or in violation of the standards of quality of the establishment;

(3) repeated violation of reasonable rules or policies established for the operation of the establishment, provided a written copy of the rules or policies has been provided to the employee, provided that any standards, rules or policies are consistently enforced and not applied to a particular employee in a disparate manner without justification; or

(4) for serious misconduct which is directly related to the employment relationship and has a detrimental effect on the employer's business, and in which situation the employer cannot reasonably be expected to take any course other than to terminate the employment of the employee.

"Good cause" shall not include the failure of an employee to agree to a covenant or agreement under this act, if the period of employment has already commenced.

"Low-wage employee" means an employee whose average weekly earnings, calculated by dividing the employee's earnings during the period of 12 calendar months immediately preceding the date of termination of employment by 52, or the number of weeks that the employee was actually paid during the 52 week period, are less than the Statewide average weekly remuneration as determined pursuant to R.S.43:21-3(c)(3).

"Pay" means hourly wages or periodic salary, including tips, regularly paid and nondiscretionary commissions and bonuses, and regularly paid overtime. "Pay" shall not mean fringe benefits.

"Restrictive covenant" means an agreement between an employer and an employee arising out of an existing or anticipated employment relationship, or an agreement between an employer and an employee with respect to severance pay, under which the employee or expected employee agrees not to engage in certain specified activities competitive with the employee's employer after the employment relationship has ended.

"Termination" means:

(1) a dismissal, including that resulting from the elimination of a position, of an employee by an employer;

(2) a layoff or suspension of an employee by an employer for more than two consecutive months; or

(3) a quitting of employment or a retirement by an employee induced by an act or omission of the employer, after notice to the employer of the act or omission without appropriate relief by the employer, so intolerable that under the circumstances a reasonable individual would quit or retire.

"Trade secrets" has the meaning given in section 2 of the "New Jersey Trade Secrets Act," P.L.2011, c.161 (C.56:15-2).

3. a. An employer may require or request that an employee enter into a restrictive covenant as a condition of employment or with respect to severance pay as provided in this act. A restrictive covenant is enforceable to the extent that it meets the following requirements:

(1) If the agreement is entered into in connection with the commencement of employment, the employer shall disclose the terms of the agreement in writing to the prospective employee by the earlier of a formal offer of employment, or 30 business days before the commencement of the employee's employment or, if the agreement is entered into after commencement of employment, the employer must provide the agreement at least 30 business days before the agreement is to be effective. The agreement shall be signed by the employer and the employee and expressly state that the employee has the right to consult with counsel prior to signing.

(2) The agreement shall not be broader than necessary to protect the legitimate business interests of the employer, including the employer's trade secrets or other confidential information that would not otherwise qualify as a trade secret, including sales information, business strategies and plans, customer information, and price information. An agreement may be presumed necessary where the legitimate business interest cannot be adequately protected through an alternative agreement, including but not limited to: an agreement not to solicit or hire employees of the employer; an agreement not to solicit or transact business with customers, clients, referral sources, or vendors of the employer; or a nondisclosure or confidentiality agreement.

(3) The agreement may restrict the employee's engaging in activities competitive with the employee's former employer for a period not to exceed 12 months following the date of termination of employment.

(4) The agreement shall be reasonable in geographical reach and limited to the geographic areas in which the employee provided services or had a material presence or influence during the two years preceding the date of termination of employment, and shall not prohibit an employee from seeking employment in other states.

(5) The agreement shall be reasonable in the scope of proscribed activities in relation to the interests protected and limited to only the specific types of services provided by the employee at any time during the last two years of employment.

(6) The agreement shall not penalize an employee for defending against or challenging the validity or enforceability of the covenant.

(7) The agreement shall not contain a choice of law provision that would have the effect of avoiding the requirements of this section, if the employee is a resident of or employed in the State at the time of termination of employment and has been for at least 30 days immediately preceding the employee's termination of employment.

(8) The agreement shall not waive an employee's substantive, procedural and remedial rights provided under this act, any other act or administrative regulation, or under the common law.

(9) The agreement shall not restrict an employee from providing a service to a customer or client of the employer, if the employee does not initiate or solicit the customer or client.

(10) The agreement shall not be unduly burdensome on the employee, injurious to the public, or inconsistent with public policy.

b. An agreement made under this act shall not be enforceable against:

(1) an employee who is classified as nonexempt under the federal "Fair Labor Standards Act of 1938" (29 U.S.C. s.201 et seq.);

(2) an undergraduate or graduate student that undertakes an internship or otherwise enters into a short-term employment relationship with an employer, whether paid or unpaid, while enrolled in a full-time or part-time undergraduate or graduate educational institution;

(3) an apprentice participating in an apprenticeship program registered by the Office of Apprenticeship of the U.S. Department of Labor and meeting the standards established by the office, or registered by a State apprenticeship agency recognized by the office;

(4) a seasonal or temporary employee;

(5) an employee who has been terminated without good cause or laid off by action of the employer;

(6) an independent contractor;

(7) an employee under the age of 18;

(8) a low-wage employee; or

(9) an employee whose period of service to an employer is less than one year.

c. Not later than 10 days after the termination of an employment relationship or the voluntary resignation of the employee, the employer shall notify the employee in writing of the employer's intent to enforce the agreement. If the employer fails to provide that notice, the agreement shall be void. This subsection shall not apply if the employee has been terminated for good cause.

d. In cases of termination of an employment relationship without good cause, during any period after the employment relationship has ended and a covenant under this section is effective, the employer shall pay the employee an amount equal to 100 percent of the pay to which the employee would have been entitled for work that would have been performed during the period prescribed under this section, and continue to make whatever benefit contributions would be required in order to maintain the fringe benefits to which the employee would have been entitled for work that would have been performed during the period prescribed under this section. A covenant shall not permit an employer to unilaterally discontinue or otherwise fail or refuse to make the payments except in the event of a breach by the employee. This subsection shall not apply if the employee has been terminated for good cause.

e. Any provision of an agreement established under this section shall be, to the extent it conflicts with this section, void and unenforceable, provided that a court of competent jurisdiction may revise the agreement pursuant to section 4 of this act.

4. a. An employee subject to a restrictive covenant under this act may bring a civil action in a court of competent jurisdiction against any employer or person alleged to have violated this act. An employee shall bring any action under this act within two years of the later of:

(1) when a prohibited agreement was signed;

(2) when the employee learns of the prohibited agreement;

(3) when the employment relationship is terminated; or

(4) when the employer takes any step to enforce the agreement.

The court shall have jurisdiction to void or revise any agreement and to order all appropriate relief, including: enjoining the conduct of any person or employer; ordering payment of liquidated damages; and awarding lost compensation, damages, reasonable attorneys' fees and costs.

b. For the purposes of this section, liquidated damages shall be calculated as an amount not more than $10,000.

5. Every employer shall post a copy of this act or a summary approved by the Department of Labor and Workforce Development in a prominent place in the work area. An employer who fails to post a copy of this act or a summary of this act shall be issued by the department a written warning for the first violation, and shall be fined up to $250 for a second violation and up to $1,000 for the third and each subsequent violation. A penalty imposed by the department pursuant to this section shall be collected and enforced by summary proceedings pursuant to the provisions of the "Penalty Enforcement Law of 1999," P.L.1999, c.274 (C.2A:58-10 et seq.).

6. This act shall take effect immediately, but shall not apply to any agreement in effect on or before the date of enactment.

STATEMENT

This bill places certain limitations on restrictive covenants between employers and employees. Restrictive covenants are agreements between employers and employees or anticipated employees under which the employee or anticipated employee agrees not to engage in certain specified activities competitive with the employer after the employment relationship has ended. Employees are often required to enter into restrictive covenants as a condition of employment, or as a condition of receiving severance pay.

Under the bill, an employer may require or request that an employee enter into a restrictive covenant as a condition of employment or with respect to severance pay. A restrictive covenant is enforceable to the extent that it meets the following requirements:

(1) 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 expressly state that the employee has the right to consult with counsel prior to signing.

(2) The agreement may not be broader than necessary to protect the legitimate business interests of the employer, including the employer's trade secrets or other confidential information that would not otherwise qualify as a trade secret.

(4) The agreement must be reasonable in geographical reach and limited to the geographic areas in which the employee provided services or had a material presence or influence during the two years preceding the date of termination of employment, and may not prohibit an employee from seeking employment in other states.

(5) The agreement must be reasonable in the scope of proscribed activities in relation to the interests protected and limited to only the specific types of services provided by the employee at any time during the last two years of employment.

(6) The agreement must not penalize an employee for defending against or challenging the validity or enforceability of the covenant.

(7) 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 at the time of termination of employment and has been for at least 30 days immediately preceding the employee's termination of employment.

(8) The agreement must not waive an employee's substantive, procedural and remedial rights provided under the bill, any other act or administrative regulation, or under the common law.

(9) The agreement must not restrict an employee from providing a service to a customer or client of the employer, if the employee does not initiate or solicit the customer or client.

(10) The agreement may not be unduly burdensome on the employee, injurious to the public, or inconsistent with public policy.

The bill also provides that restrictive covenants are not enforceable against:

(1) an employee who is classified as nonexempt under the federal "Fair Labor Standards Act of 1938" (29 U.S.C. s.201 et seq.);

(4) a seasonal or temporary employee;

(5) an employee who has been terminated without good cause or laid off by action of the employer;

(6) an independent contractor;

(7) an employee under the age of 18;

(8) a low-wage employee; or

(9) an employee whose period of service to an employer is less than one year.

The bill provides that, not later than 10 days after the termination of an employment relationship or the voluntary resignation of the employee, the employer must notify the employee in writing of the employer's intent to enforce the agreement. If the employer fails to provide notice, the agreement is void. This requirement does not apply if the employee has been terminated for good cause.

In cases of termination of an employment relationship without good cause, during any period after the employment relationship 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 the fringe benefits to which the employee would have been entitled for work that would have been performed. A covenant does not permit an employer to unilaterally discontinue or otherwise fail or refuse to make the payments except in the event of a breach by the employee. These requirements do not apply if the employee has been terminated for good cause.

An employee subject to a restrictive covenant may bring a civil action in a court of competent jurisdiction against any employer or person alleged to have violated the bill. An employee must bring the action within two years of the later of:

(1) when a prohibited agreement was signed;

(2) when the employee learns of the prohibited agreement;

(3) when the employment relationship is terminated; or

(4) when the employer takes any step to enforce the agreement.

The court has jurisdiction to void or revise any agreement and to order appropriate relief.

The bill also requires employers to post a copy of the bill or a summary of its requirements in a prominent place in the work area.