Recently, A1650, legislation seeking to limit the use of restrictive covenants, including noncompete agreements, cleared the Assembly Labor Committee. While this bill has a noble goal of protecting certain workers, its unintended consequences will make restrictive covenants impossible to implement, eliminating an important tool for employers in many industries that deal with proprietary and classified information.
In New Jersey, there already are limits on restrictive covenants for employers. The practice is only legal when it advances legitimate interests of an employer, such as protecting trade secrets or other confidential information, or preserving customer relationships or goodwill. Blanket restrictions on a worker’s economic mobility without any connection to legitimate interests are per se illegal. Likewise, restrictions that create an undue hardship for the employee also violate New Jersey law. In evaluating disputed restrictive covenants, our courts routinely rewrite invalid agreements, so they are fair to both parties.
Unfortunately, in recent years, there have been high-profile instances of certain employers imposing restrictive covenants on low-wage employees, such as sandwich makers or retail clerks. In many of these cases, no employer-valued business information or customer relationships are endangered by these employees freely moving on to new opportunities. Thus, restrictive covenants are likely invalid as applied to such workers. Nevertheless, some employers still impose these agreements, relying on low-wage employees’ lack of financial resources to understand the law or seek justice in the courts. This calculated outcome is repugnant to free-employment-market ideals.
To address this crop of illegal restrictive covenants, New Jersey’s Legislature has proposed a new law that severely limits the use of restrictive covenants by all employers. Proponents of the bill point to evidence of the abuses mentioned above, and then cite the current economic downtown as justification for sweeping change. Among other things, this proposed new law requires employers to provide 100% pay to former employees during the duration of a restrictive covenant (also known as “garden pay”); limits the duration of all restrictive covenants to 12 months; and creates a new type of legal action for employees to bring against employers who violate the proposed law.
The proposed law’s requirements will have the unintended consequence of making the legitimate use of restrictive covenants practically impossible for New Jersey businesses. First, the proposed law’s “one-size-fits-all” approach will not work in New Jersey’s diverse economy. While garden pay may make sense to deter restrictive covenants for low-wage workers, it would be absurd to legally entitle highly compensated workers to a year of automatic severance pay because the employer imposed necessary post-employment restrictions on their use of proprietary business information. This will depress wages in New Jersey, as employers move high-paying positions to other states or reduce the compensation of lower-level employees to account for the entitlement.
Second, post-employment restrictions for some employees, such as executives with deep institutional knowledge, or scientists and engineers who learn valuable proprietary information on the job, may require longer durations than others with limited access to such knowledge or information. Again, prohibiting businesses from protecting their capital investments through reasonable post-employment durations will result in them looking for more friendly states to place high-paying positions. This makes New Jersey an even less attractive state in which to do business.
And last, but not least, class action lawyers should not be empowered to shake down hardworking small business owners who fail to account for one of the proposed law’s confusing requirements when entering these agreements to protect their legitimate interests.
In our polarized world, subtlety and nuance is almost always lost in a cacophony of the loudest voices spewing hyperbole. As a result, problems that require an analytical scalpel end up being resolved with an ideological sledgehammer. Regarding restrictive covenants, the argument against them is easy to make and hard to refute in the court of public opinion: “If America is the land of opportunity, then agreements that limit opportunity are un-American.”
However, simple soundbites like this rarely reflect reality, which is always complicated. We should resist the temptation here to overcorrect the problem the Legislature identified with a law that is overbroad and ill-suited to other segments of New Jersey’s economy. Instead, we must strike an effective balance between the needs of employees and businesses. Only through thoughtful discussion and true compromise can this balance be maintained for the economic benefit of future generations of New Jersey citizens.
Anthony Anastasio is the president of the New Jersey Civil Justice Institute.