David I. Rosen, Grace A. Byrd
Employment and Labor
January 29, 2019
For many businesses, corporate success is reliant on human
capital. A key component to managing a
business’s workforce and safeguarding its confidential information and
relationships with customers and other assets is the ability to place
post-employment restrictions on employees. However, the trend nationwide is
toward legislation that would dramatically limit the enforceability of
restrictive covenants and therefore threaten employers’ property and
On the federal level, the Defend Against Trade Secrets Act does
protect trade secrets from being used post-employment if certain conditions are
met, however the proposed Workforce Mobility Act of 2018, Senate Bill 2782
(2018), introduced in the U.S. Senate in April 2018 would be a national ban on
employers engaged in interstate commerce on requiring employees to enter into
non-competition agreements. In May 2018, this bill was referred to the
Committee on Health, Education, Labor, and Pension. A similar bill was introduced in the U.S.
House of Representatives in April 2018, H.R. 5631, and referred to the House
subcommittee on Regulatory Reform, Commercial and Antitrust Law in May 2018. No further actions have been taken on either
Several states have recently passed legislation limiting the
use of restrictive covenant agreements in certain contexts, such as California
While employers are well aware that California generally
prohibits non-competes in the employment context (with certain exceptions),
some employers had successfully contracted around this prohibition by incorporating
choice of law provisions applying the law of other states to contract disputes. However, effective January 1, 2017,
California Labor Code section 925, which applies to all contracts entered into
after that date, voids any agreement that requires an employee who “primarily
resides and works in California, as a condition of employment” to agree to a
foreign venue and choice of law requiring the application of the law of another
state. Significantly, Section 925 does
not apply if the employee is represented by counsel who negotiates the terms of
the forum selection or choice of law clause applicable to employment disputes.
The recent Massachusetts law that went into effect on October
1, 2018 limits the enforceability of certain non-competes in the employment
context and codifies express requirements that agreements must meet to be enforceable.
Other states, such as Pennsylvania and Vermont,
have gone further by recently proposing legislation aimed at entirely prohibiting
the use of restrictive covenant agreements in the employment context. We will certainly be keeping an eye on this
proposed legislation in 2019.
Closer to home, New Jersey employers are concerned about the
potential enactment of a bill that would, if it were enacted unchanged,
severely limit the enforceability of non-competition and other restrictive
covenant agreements. Last May, Assembly Bill A1769, (the “Bill”) was introduced
in the New Jersey state assembly. The
Bill as currently written would impose numerous and significant restrictions on
the enforceability of non-competition agreements. Some of the more onerous provisions in the Bill
are: (1) limitations on the duration of agreements to one-year post-employment;
(2) requirements that employers pay employee full wages and benefits during the
duration of the enforcement of the agreement, unless the employee was terminated
for “misconduct” as defined therein; (3) requirements that notice of the
agreement must be given by the earlier of the time of a formal offer of
employment or 30 days before commencement of employment or the effective date
of the agreement; (4) requirements that the agreement must be limited in scope
to the geographic area where the employee provided services or had a material
presence within the two years preceding the date of separation, and a
prohibition of a restriction of the employee from working in states other than
NJ; and (5) prohibition on blue-penciling (i.e. rewriting, striking, and
modifying unenforceable provisions).
Moreover, the Bill would create a private right of action for
employees to seek relief against an employer or person who allegedly violated
the bill, and, if successful would permit the employee to recover compensatory
damages, liquidated damages, and reasonable attorneys’ fees and costs.
Some areas that would remain consistent with the current common
law governing restrictive covenant agreements include that agreements must be
no broader than necessary to protect the business interests of the employer, and
that agreements shall not be unduly burdensome on the employee, injurious to
the public or inconsistent with public policy.
The Bill would broadly apply to restrictive covenant
agreements, which it defines, in sum, as an agreement between an employer or
employee in which the employee agrees not to engage in certain post-employment
competitive activity. It is not entirely clear on the face of the Bill whether it
would apply only to non-competes or whether it would apply to other types of
restrictive covenant agreements, such as non-solicitation agreements; however,
for the most part, the Bill focuses on non-compete provisions/agreements. If enacted it would not apply retroactively
to agreements entered into before the date of enactment.
Aside from the Bill that focuses on restrictive covenant
agreements, a separate bill (Assembly Bill A1242) that would ban non-disclosure
agreements in employment discrimination, harassment and retaliation cases was
also introduced last year, which, if passed, would further limit restrictive
covenant agreements in the employment context.
The only certainty for restrictive covenants in 2019 is that
this challenging area of law will continue to evolve and change and so
employers must be prepared.
As it is unclear if and when restrictive covenant agreements
will be regulated at a federal level, employers will continue to be subject to
the vastly differing laws, reform efforts and case law governing restrictive
covenant agreements at a state level.
multistate employers, this means carefully drafting agreements with an aim to
make them enforceable in various jurisdictions or utilizing different
agreements with terms that vary by location.
In New Jersey, employers would be well advised to ensure that their
restrictive covenants are in place before the passage of the Bill, as in its
current form, the Bill is extremely restrictive to employers’ rights.
For all employers, the unsettled state of
restrictive covenant law in most locations makes it critical to stay current on
developments and regularly review agreements with counsel for compliance.
This Client Alert has been prepared by Sills Cummis & Gross P.C. for informational purposes only and does not constitute advertising or solicitation and should not be used or taken as legal advice. Those seeking legal advice should contact a member of the Firm or legal counsel licensed in their state. Transmission of this information is not intended to create, and receipt does not constitute, an attorney-client relationship. Confidential information should not be sent to Sills Cummis & Gross without first communicating directly with a member of the Firm about establishing an attorney-client relationship