Non-compete agreements have proliferated among employers, and an increasing number of employees working in New Jersey are covered by them. These types of employment agreements are typically signed during the onboarding process and purport to restrict employees from engaging in competition against the employer after they leave. However, non-compete agreements are not always enforceable. Here’s some information about non-compete agreements from the attorneys at Swartz Swidler.
What Is a Non-Compete Agreement?
A non-compete agreement is a contract under which the employee agrees that they will not work for a competitor or start a new competing business in New Jersey or the surrounding states for a certain time after the employee ceases to work for the employer. Non-compete agreements typically include a certain geographic region and might also contain other types of restrictions, including non-disclosure clauses, non-solicitation agreements, or agreements that the employee will not contact the employer’s existing clients.
Enforceability of Non-Compete Agreements
While non-compete agreements are fairly common, they are not always enforceable. New Jersey courts consider several factors when deciding whether a non-compete agreement or restrictive covenant is legal and enforceable. Courts consider such things as the interest the employer is seeking protection for, any consideration the employee received in exchange for signing the agreement, when during the employment relationship the agreement was demanded, and others.
For example, if an employer demanded the employee sign a non-compete agreement after they have already been employed for a time, the court will consider whether the employee enjoyed the continued right to remain employed and if the employee received additional compensation for signing the agreement.
Courts also consider how long the non-compete agreement calls for the restrictions, the geographical region covered, and the employee’s skills, education, and salary. For example, courts have struck down non-compete agreements purporting to restrict fast-food workers from working for other fast-food restaurants after leaving their jobs. Employers that require restrictive covenants that purport to bar all potential competition against an employer will generally be considered overbroad and unenforceable.
New Jersey courts will often recognize that employers have a legitimate need to protect the following types of interests, however:
- Trade secrets
- Non-public information
- Close and existing relationships with clients
- Unique, extraordinary, or special services provided by the employee
When Non-Compete Agreements Might Be Unenforceable
Employment law cases involving disputes over non-compete agreements require a fact-specific analysis. Punitive, overly-broad restrictive covenants will generally be deemed unenforceable. New Jersey follows a legal doctrine called the blue pencil doctrine, which allows judges to rewrite non-compete agreements to make them less restrictive. However, overbroad or unduly punitive restrictive covenants could be disregarded and deemed unenforceable.
Judges will evaluate the following factors when analyzing a non-compete agreement:
- The legitimate need for protection of the employer’s interest
- Whether the geographic area and length of the restriction impose an undue hardship on the employee
- Whether the restrictive covenant violates a public policy interest
For an agreement to be enforceable, it must satisfy all three of these factors.
To show that the interest should be protected, the employer must establish that it is a legitimate and important business interest. For example, the need to protect trade secrets or private customer lists might be legitimate and important business interests for an employer.
Overly long durations of non-compete agreements will generally not be enforceable. Instead, a time restriction should be no longer than what might be necessary to prevent an employee from using confidential information in a way that would be detrimental to the employer.
A non-compete agreement that prohibits the employee from contacting or soliciting the former employer’s customers or clients will be analyzed by considering the following factors:
- Whether the employee was the primary contact for customers
- The employee’s job
- How often has the employee had contact with customers
- How long the employer will need to hire someone else to fill the employee’s position
Other factors that courts will consider when evaluating a non-compete agreement include:
- Whether the restriction is needed to protect a legitimate commercial interest
- Whether the time restrictions are longer than necessary
- The interests of the employee
- Whether the employee will experience undue hardship by not being able to work in their chosen field within a given region
Public Interests and Non-Compete Agreements
Courts balance the interests of the employer against the interests of the employee and the public. A non-compete agreement can’t adversely and materially impact the interests of the public.
The Blue Pencil Doctrine in New Jersey
Under New Jersey’s blue pencil doctrine, judges can strike clauses in a non-compete agreement to limit its scope when the agreement is otherwise unenforceable or overbroad. This can occur when an agreement includes a clause that can be physically amended by removing offending language while leaving limited, reasonable restrictions in place.
Legislation currently pending in the New Jersey Legislature would greatly curtail the use and enforceability of restrictive covenants by employers in the state if enacted. This bill, AB 3175, would cause major changes in the ability of employers to enforce certain provisions in non-compete agreements and would prohibit employers from restricting employees from taking jobs in other states or banning employees from working with the employers’ clients when the employees did not make the first contact. It would also forbid employers from using restrictive covenants with non-exempt employees, graduate students who work in internships, temporary employees, seasonal employees, and employees terminated without misconduct.
Contact Swartz Swidler
If you have been asked to sign a non-compete agreement or have left your job and wonder whether the agreement you signed is enforceable, reach out to the employment attorneys at Swartz Swidler. We can review the contract and explain your rights. Call us today at (856) 685-7420.