New York and New Jersey may be joining the growing list of states that seek limit enforcement of restrictive covenants in employment contracts. Restrictive covenants, in the context of employment agreements, are provisions that prohibit employees from engaging in certain activities post-employment. Non-compete agreements restrict employees from working for a competitor within a specific region for a set amount of time. Similar in use and enforcement, Non-solicitation agreements prohibit former employees from soliciting clients. Non-compete agreements have been at the center of the conversation and legislation around restrictive covenants. California, Oklahoma, North Dakota, and (until recently amended) the District of Columbia have outright banned the enforcement of non-compete agreements. Many other states, including Washington, Illinois, Virginia, Massachusetts, Rhode Island, Oregon, Maine, Maryland, and most recently Colorado, passed statutes that limit enforceability to higher income earners. The limits and definitions of low wage workers vary from state to state. There is legislation before both the New York and New Jersey state legislatures that if passed would not only codify existing common law limitations, but further restrict the use of overly broad non-compete agreements.
As it stands neither state has existing statutes that regulate enforcement of non-compete agreements. Limits on enforcement have been left up to the courts. In New York, courts look to whether the non-compete “is necessary to protect the employer’s legitimate interests, does not impose an undue hardship on the employee, does not harm the public, and is reasonable in time period and geographic scope.” Similarly, in New Jersey courts test whether it “simply protects the legitimate interests of the employer, imposes no undue hardship on the employee and is not injurious to the public.” (Maw v. Adv. Clinical Commun., Inc., 846 A.2d 604 (N.J. 2004), internal quotations and citations omitted). Legitimate interests are typically interpreted to mean protecting confidential information and trade secrets and avoiding loss. (Coskey’s Television & Radio Sales & Serv., Inc. v. Foti, 602 A.2d 789 (App. Div. 1992). Courts in New York and New Jersey both, citing public policy, favor employers and decline to enforcement unreasonable and overly broad non-compete agreements. While there is no existing ban on the use of non-compete agreements, both states do carve out statutory or regulatory exceptions for certain groups of professionals. Lawyers and psychologists in New Jersey and lawyers, broadcasters, and employees of Financial Industry Regulatory Authority (FINRA) members in New York cannot be bound by non-compete agreements.
Notably both jurisdictions permit for blue penciling – modification or narrowing of the agreement without striking down the entirety of the agreement. Courts are not required to blue pencil and may void the entire agreement. An express severability or blue pencil provision is the best way to ensure courts will enforce the agreement to maximum enforceability.
Where is the Law Headed?
New York — The legislation on the horizon in New York does not depart from how courts have evaluated the validity of non-competes in the state. New York Senate Bill S734 proposes to codify the existing common law requirements for enforcement:
A non-compete agreement is only enforceable if such agreement: (a) is no greater than required for the protection of the legitimate interest of the employer; (b) does not impose an undue hardship on the employee; (c) is not injurious to the public; and (d) is reasonable in time period and geographic scope.
The bill, in response to Covid-19 related job loss or changes also defines undue hardship as including loss “due to circumstances surrounding a 16 declared state of emergency or disaster emergency.” The primary goal of the bill is to curtail the growing use of non-compete agreements for low wage employees.
New Jersey — The proposed legislation in New Jersey goes significantly further. Assembly Bill 3715 and Senate Bill 1410 was introduced in earlier this year. If passed, significantly it would make the non-compete agreements unenforceable 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 a determination of misconduct 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.
For employees who fall outside of these carve outs, the proposed law goes beyond codifying the existing common law requirements. Employers, under the bill, would have ten days after termination of employment to notify employee of intent to enforce the non-compete agreement. Failure to notify would void the agreement. Except when terminated with cause, the bill would also require employers to continue to pay salary and provide benefits for the duration of the agreement. The duration of non-compete agreements would be limited to a year.
The bill creates a cause of action with a liquidated damages cap of $10,000. If passed, the bill would take effect immediately and include a workplace posting requirement.
The proposed law in New York which does not depart from New York common law would not change much. New York employers who wish to include non-compete agreements will need to continue to draft non-compete agreements narrowly, making sure to tailor them to specific enumerated interests, and include blue pencil provisions to ensure maximum enforceability. New York courts treat non-solicitation agreements similarly to non-compete agreements and the same steps should be taken. The proposed law in New Jersey, while subject to change, may make employers think twice before including non-compete agreements for high wage employees and bans use in low wage employment contracts. Until it is passed, New Jersey employers should continue to adhere to the common law requirements and include blue pencil provisions.
Both laws reflect the national trend towards doing away with or limiting non-compete agreements and other restrictive covenants on a state level. The Federal Trade Commission (FTC) may also be considering federal regulations either limiting or banning non-competes agreements nationwide. The scope of potential regulations and whether or not they will be enforceable remains to be seen. New York and New Jersey employers who utilize non-compete agreements to protect their interests should keep an eye on their state legislatures.