Local lawmakers, following the lead of national counterparts and the courts, are softening on the hardline stance companies have taken with employees leaving to work for competitors.
New Jersey is the latest state to have legislators propose changes to noncompete agreements, as lawmakers argue — also like their national counterparts — that these restrictions on post-employment activities restrain commerce and discourage innovation.
The state’s version of the legislation is bill A3715, co-sponsored by Assemblyman Paul Moriarty (D-Turnersville) and Assemblyman Benjie Wimberly (D-Paterson). Jack Losinger, a member of the firm at Saiber LLC, said the bill, which was introduced in May and hasn’t cleared Assembly committees yet, still has a way to go.
“But, everyone appears to think it has momentum and could be poised to be passed into law,” he added.
Across state legislatures with diverging agenda-setting political majorities, there’s been a unified direction toward introducing limits on the enforceability of noncompete agreements. Some states, such as California and Oklahoma, have outright banned them.
On the federal level, a similar course was charted by one of President Joe Biden’s executive orders last year. Biden’s move asked the Federal Trade Commission to come up with national regulations regarding noncompete clauses.
While it didn’t immediately introduce specific regulations businesses would now have to follow, the executive order paved the way for that rulemaking agency to curtail these agreements and others that opponents argue hamstring the movement of workers.
Attorneys have for some time before these changes seen an attitude-shift on noncompete agreements at the court level, Losinger said.
“The current state of the law is that courts are fairly consistently moving away from this already,” he said. “They’ve become disfavored, as courts are usually hesitant to force someone to not work. The argument is that it’s a detrimental effect for people who have to be able to work, as it might be the only job they’ve ever known and it’s just not an option for them not to work for a period of time.”
Even when the legal enforceability of an employer’s noncompete clause is not completely invalidated, the past few years of case law in New Jersey has set a precedent of using what’s called the “blue pencil” for post-employment restrictions.
“Basically, the courts have looked to erase parts of these agreements that are unduly burdensome, altering restrictions and finding a middle ground that’s found to be reasonable to both sides,” he said.
Businesses that value these limitations on what workers can do after they’re off the payroll might have been content with the courts’ mediation efforts, but Losinger said it’s not likely going to be a continued practice if New Jersey lawmakers pass A3715.
While the bill wouldn’t completely ban noncompetes, it renders them strictly unenforceable for a wide range of employee categories. In short, they can’t be used against nonexempt employees, independent contractors, employees who have worked less than a year for a company or those fired by their employers.
Outside of those categories, noncompetes under the proposed bill would still have a few new wrinkles. Among them, employers would be required to continue paying salary and benefits to employees not allowed to work when noncompetes are enforced. Employers also would be mandated to give employees advance notice before the enforcement goes into effect.
A distinction Losinger is quick to draw is between noncompete arrangements and nonsolicitation. The latter introduces restrictions on employees contacting and attempting to reestablish business relationships with former customers after leaving a company.
New Jersey’s looming legislation doesn’t forbid those, but limits them, too. Losinger said nonsolicitation policies would only be enforceable in regard to former employees initiating communications with customers directly for the purpose of solicitation.
So, just telling an old customer you’ve landed somewhere new? Not enough.
“And, in practice, it’s going to be difficult to determine who initiated that contact, the former employee themselves or the customer,” Losinger said. “As it’s written, it’s vague enough that I see that as a new horizon of legal battles.”
In addition to these potential changes, employees could have the ability to sue employers for noncompete agreements without there being any attempt to enforce them. Legal action could be triggered anytime within two years of employees just learning of a prohibitive agreement.
Given all the potentially costly consequences, Losinger said employers should have an antenna up to what happens with noncompete legislation in New Jersey.
He wouldn’t have them panicking, however.
For one thing, as the current bill is written, the statute wouldn’t apply retroactively to employee-employer agreements that have been in effect before any new law is enacted.
“A lot of sales-driven companies have these noncompete clauses in New Jersey — although I don’t know the exact percentage,” Losinger said. “So those companies wouldn’t necessarily have to rewrite existing agreements. But new ones would have to be significantly changed.”