Proposed Legislation Could Change the Competitive Playing Field in New Jersey

New Jersey Courts have consistently enforced covenants not to compete (also known as restrictive covenants) contained within an employment agreement.  Those covenants have traditionally been used by an employer to prevent an employee from leaving his/her employ and immediately soliciting the employer’s customers and/or clients – – many of whom the employee would not have known except as a result of working for that particular employer.  Those covenants have also been used to prevent an employee from leaving his/her employment and using the employer’s confidential information (such as information about the employer’s pricing, margins, profits, etc.) to gain an unfair advantage in competition with the former employer.    Provided that the covenants were reasonable and not simply intended to thwart fair competition, employers could be assured that their customer/client relationships and their confidential information would be protected.

Introduced on April 4, 2013, Assembly Bill No. 3970 could potentially change that competitive landscape in New Jersey.  Assembly Bill No. 3970 is designated as “an act concerning certain employment contracts and unemployment compensation” and consists of only 2 paragraphs.  It specifically states:

1.An unemployed individual found to be eligible to receive benefits pursuant to the “unemployment compensation law,” R.S. 43:21-1 et seq, shall not be bound by any covenant, contract, or agreement, entered into with the individual’s most recent employer, not to compete, not to disclose, or not to solicit.  This section shall not be construed to apply to any covenant, contract, or agreement in effect on or before the date of enactment …

2.This act shall take effect immediately.

If this proposed legislation is adopted, employment agreements containing covenants not to compete (restrictive covenants) would not be enforceable against  an employee who is terminated,  even if terminated for cause, if that employee is eligible to receive unemployment compensation as a result of being terminated. 

Although it is clear that the proponents of the legislation have good intentions – – they presumably want to protect the integrity of unemployment trust funds and want to facilitate an unemployed person’s ability to become re-employed – – it is also clear that the proponents have not fully considered the potential consequences of this proposed legislation.  For example, an employee subject to a covenant not to compete could intentionally underperform with the intent of being terminated.  Subsequent to being terminated, that employee could immediately utilize all of the confidential information garnered from his/her prior employment to compete against his prior employer.  Unlikely?  Do you as an employer want to take that chance?

If you are truly concerned about the potential consequences of this proposed legislation, we would recommend that you contact your state legislator and express your concerns. Exercise your political power.  We would also suggest that you make certain that you, as an employer, do not waste time in finalizing your current employment agreements with covenants and getting them executed.  The proposed legislation will not affect agreements that pre-date the adoption date of the legislation.  Alternatively, there may be actions that could be taken to protect an employer’s confidential information even after the adoption of the legislation.  We would be available to discuss those options if and when they arise.