An Article By: Scott P. Borsack
Pending in the New Jersey Legislature is a bill that would severely restrict the ability of employers to use so-called restrictive covenants or post-employment restrictions for their employees, and this serves to limit potential future employment. Lest you think this is a shot in the dark, more than 14 states have enacted similar laws and the United States Federal Trade Commission recently promulgated a regulation to limit the use of these restrictions in employment. If you have not heard any of this, read on.
Slowly working its way through the New Jersey Assembly is a bill that, if enacted, would rewrite many of the rules applicable to employees. The present iteration of the legislation represents the third attempt to enact a law targeted to eliminate such restrictions. It is common for employers to attempt, by agreements or otherwise, to limit who an employee can work for once leaving the employ of their current employer.
Basically, the bill provides that any post-employment restriction can be no broader than is necessary to protect legitimate interests of the employer and cannot be unduly burdensome. The employee must be made aware of the potential for the application of the restriction at the earlier of receipt of a formal offer or 30 days before employment commences. If an agreement is to be executed after employment begins, the employee must have 30 days’ notice of the effective date of the provision before it can be enforced.
Further, the restriction can be effective for no more than 12 months, and the geographic restriction can only be applied to regions where the employer had a substantial presence during the last two years of the employee’s tenure. Under the bill, an employer would no longer be permitted to prevent employees from working anywhere in the United States, a four- state area or beyond the borders of the State of New Jersey.
Interestingly, under the same bill, if an employee does not solicit a customer of the former employer but is instead contacted by the customer directly, the employee cannot be prevented from providing services to the customer. My favorite provision addresses employees terminated without cause. Most employees in New Jersey understand that they can be fired at any time, for any reason or no reason at all. This is sometimes referred to as employment “at will.” The bill provides that a restrictive covenant cannot be applied to an employee who is terminated without a determination of misconduct, which is defined in the bill. As a result, an employee who is terminated for no reason cannot be restricted from providing services to other employers. Other states that limit the application of post-employment restrictions include New York, Rhode Island, Connecticut, Indiana and Utah. Some states prevent such restrictions to health care providers only.
Lest you think this is some way- out provision, the US Federal Trade Commission issued a notice of proposed rule-making earlier this year limiting the application of restrictive covenants. Finding that restrictive covenants amount to an unfair method of limiting competition, the USFTC proposed to eliminate the application of all restrictive covenants except those in a limited set of circumstances. The prohibition would not apply to those restrictions that are a part of the sale of a business or substantially all assets of a business. The prohibition is far broader than the restriction proposed in New Jersey or those on the books in other states. The proposed rule would take precedence over state laws, pre-empting their applications. So, for example, while the New Jersey bill — if enacted — would permit a restriction for one year following termination, the federal rule would not; and because of the pre-emption provision in the rule, the federal rule would apply. Any agreements that contain restrictive covenants on the date the federal rule is adopted would have to be rescinded, according to the rule. The rule becomes effective 180 days after its final publication. As we go to press with this edition of the Szaferman newsletter, the comment period for the rule is open. Once the comment period concludes, the rule can be further amended, rescinded, or published in final form. We might expect some final word on the rule this coming summer.
Whether it is the New Jersey bill which becomes law, or the USFTC rule, which is finally promulgated, chances are pretty good in 2023 that employees in New Jersey and potentially around the country will likely have more choices of where to seek employment after separating from an employer.
Post-employment restrictions could be going, going, GONE.
