By Mark F. Kluger and William H. Healey
Last month, the New Jersey Senate began considering a law that would drastically limit employers’ use of non-compete agreements in the state. The law follows a similar trend of proposed legislation and court decisions in New York State that also attack the efficacy of restrictive covenants for employers.
In its waning months, the Obama administration urged states to pass laws banning or limiting non-competes. Guess what state, as far to the left…coast as possible, already prohibited all restrictive covenants for years. In March 2016, the U.S. Treasury Department kicked off the campaign with a report claiming that such agreements are abusive, citing the following data based on the 30 million US workers:
- 37% of all workers claim to have been bound by a non-compete at some time;
- 18% claimed to be bound at the time of the study;
- 15% of employees without a college degree have non-competes; and
- 14% of those earning less than $40,000 annually said they are bound.
Shortly after the report, the New York Attorney General proposed legislation to the state legislature that would prohibit non-competes for any employee classified as non-exempt, and in July 2017, the New York City council drafted a similar law that would ban non-competes for lower wage earners in New York City. That kind of blanket legislation would mean that no matter what kind of access an employee had to trade secrets, they could not be prohibited from being lured away by a competitor. Could confidentiality agreements help employers affected by these laws? They are great to have, but it is tough to prove a breach.
It’s all Jimmy Johns’ fault. Many opposed to non-competes have used the sandwich shop franchise as the poster child for their cause. Jimmy Johns required all of its sandwich makers and delivery drivers to sign a non-compete prohibiting them from working for any other sandwich shop within a 3 mile radius of any of the 2,600 Jimmy Johns in the country for 2 years post-employment. Clearly, who can argue that if one of Jimmy’s sandwich-makers goes to the corner deli within 2 years, he/she will bring with them their customer base and the secret to JJs’ processed meats and really special bread. Even we think that Jimmy Johns spread the honey mustard a bit too thick. More importantly, so did the state Attorneys General, who went after the franchisor and the franchisees and made them stand down.
Most employers that have employees sign non-competes do so to protect legitimate business interests. Yet in an ongoing effort to drive businesses further south, the New Jersey Senate is currently considering a bill that would prohibit non-competes for any non-exempt employee, and render unenforceable those with employees who are terminated without cause (however that will be defined in the employment-at-will world), laid off, or worked for less than 1 year. Also, under the law, non-competes could not exceed 12 months during which the employer would be required to pay the employee’s full wages and continue benefits (unless termination is with cause). And an employer could not prohibit a former employee from performing services for a customer or client when working for a new employer, unless the former employee did the soliciting him/herself. So the guy in the next office makes the call and the former employee can start right up performing services for the customers of his/her former employer. And just in case you want to get creative–employers would not be able to use choice of law provisions in the agreement to avoid the prohibitions. There are a number of other equally depressing provisions, but why keep dragging down the crowd right before the holidays.
Here is some good cheer to lift your spirits. As currently written, the law would grandfather all existing non-compete agreements. So, if you are like us and haven’t yet figured out what to give your employees for the holidays, how about a brand new Confidentiality, Non-Solicitation and Non-Competition Agreement? These come in small, medium and large and a variety of colors! Hurry, the ability to do so may end soon.