Employers who rely upon non-compete agreements and non-compete provisions in their employment agreements should prepare to change their practices in the near future.
There is a broad trend across the country disfavoring the use of non-compete provisions.
In January of this year, the Federal Trade Commission proposed a rule that would ban employers from imposing non-compete provisions on their workers. The rule makes it illegal for an employer (i) to enter into or attempt to enter into a non-compete with an employee, (ii) maintain a non-compete with a worker, or (iii) represent to a worker, under certain circumstances, that the worker is subject to a non-compete. The rule also requires employers to rescind existing non-competes and actively inform employees that the non-compete provisions or agreements are unenforceable. The rule applies to independent contractors and direct employees, whether paid or unpaid. The public comment period on this rule ends on April 19, 2023.
Closer to home, there are bills proposed in both New York and New Jersey that would severely limit or entirely prohibit the use of non-competes. Introduced previously, and reintroduced during this legislative session, the bill proposed in New York’s Senate would prohibit all employers from seeking, requiring, demanding or accepting a non-compete agreement from an employee. The bill appears to apply broadly to most employers and employees. The bill would also void all existing non-complete agreements. The bill does, however, distinguish non-compete agreements from other restrictive terms protecting employer trade secrets and confidentiality and specifically states that the latter types of restrictions are not impacted by this bill.
The New Jersey bill limiting non-compete agreements and provisions is more nuanced. Under the New Jersey bill, non-competes are prohibited for specific categories of workers, namely employees classified as nonexempt under the Fair Labor Standard Act, undergraduate or graduate level paid and unpaid interns, apprentices, seasonal or temporary workers, employees laid off or terminated without a determination of misconduct, independent contractors, employees under the age of 18, low-wage employees, and employees whose period of service is less than one year.
Any otherwise allowable non-compete agreements must be reasonable in geographic reach and scope and cannotexceed 12 months following termination date. Generally, the agreement must not “be broader than necessary to” protect the employer’s “legitimate business interests,” including the employer’s trade secrets and confidential information. See A3715(3)(a)(1). Non-compete agreements cannot “restrict an employee from providing a service to a customer or client if the employee did not initiate or solicit the customer or client.” See A3715(3)(a)(9).
The New Jersey bill imposes certain notice requirements on the employer. And, importantly, should an employer enforce a non-compete against an employee, the employer must compensate the employee after termination “an amount equal to 100 percent of the pay which the employee would have been entitled for work that would have been performed during the period prescribed” by the non-compete and “continue to make whatever benefit contributions would be required in order the maintain the fringe benefits to which the employee would have been entitled.” See A3715(3)(d).
Finally, the New Jersey bill declares “No-poach” agreements void and against public policy, defining such agreement as “any agreement between employers or between an employer acting as a contractor and any legal person acting as a contractee that restricts or hinders the ability of an employer to contract for the services of a low-wage employee.” See A3715(2).
Under either bill, employees have the ability to bring a lawsuit for alleged employer violations and seek damages, including liquidated damages up to $10,000.
Although neither bill has yet to become law, eventual passage in some form is likely. Employers should start reviewing their existing practices with respect to non-competes in preparation for these restrictions.