Bill Introduced in NJ Assembly to Limit Enforcement of Non-Compete and Non-Solicitation Agreements

A bill introduced in the New Jersey Legislature on April 4, 2013, Assembly Bill 3970, seeks to prohibit enforcement of agreements restricting departing employees from competing, disclosing confidential information, or soliciting employees or customers if those employees are found eligible to receive unemployment compensation benefits.

The legislation is intended to remove barriers for those seeking new employment, but the language of the proposed statute is broad and provides that an unemployed individual found eligible to receive unemployment benefits “shall not be bound by any covenant, contract, or agreement . . . not to compete, not to disclose, or not to solicit.”  A copy of the bill can be found here.   Thus, even agreements allowing a terminated employee to work for a competing firm, but prohibiting the employee from soliciting customers or employees or disclosing trade secrets could be invalidated.

The proposed law, which would not apply to any agreement or covenant in effect before the law is enacted, raises a number of issues for employers and employees.  If enacted, employers may be reluctant to terminate underperforming workers because of fears the employer will not be able to adequately prevent such terminated employees from competing and soliciting their clients and employees.  The proposed legislation may also cause more employers to put such agreements in place before enactment of the statute, thereby increasing the number of employees currently subject to non-compete and non-solicitation agreements.

Under the proposed legislation, the enforceability of non-disclosure, non-competition, and non-solicitation agreements would turn on whether the terminated employee is found eligible for unemployment benefits.  The legislation, therefore, also could lead to more unemployment compensation disputes regarding the circumstances surrounding an employee’s departure, as employers seek to maintain contractual post-employment restrictions and employees seek to eliminate them.

Whether the proposed statute will be enacted is uncertain, but even given the prospect of such a significant change in the law, employers should look at their existing workforce, employment agreements, and workplace policies and procedures to evaluate whether the investments they have made in their business and employees are being adequately protected.