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New Jersey’s Variety of Non-Compete Clause: Limitations in Healthcare Employment Contracts

While all eyes are on the Federal Trade Commission’s proposal to ban non-compete clauses in employment contracts, let’s not lose sight of the Garden State variety being cultivated in our own backyard. On May 19, 2022, the New Jersey Assembly Labor Committee voted in favor of A.B. 3715, which would impose significant restrictions on the scope and enforceability of restrictive covenants in the state’s employment contracts. If A.B. 3715 becomes law, New Jersey would be among the most challenging states for employers seeking to restrict employee activities post-employment. This will significantly impact professional employment contracts in the healthcare field.

Proponents of A.B. 3715 argue that non-competes hinder free markets. They say that restrictive covenants, covenants not to compete, no-poach agreements, and the like decrease competition among employers for employees and among employees for available jobs. Further, non-competes inhibit optimal employment matches, reduce productivity, and depress earnings. They say that non-competes stifle innovation by imposing artificial hardships on specialized professionals seeking employment to optimize their skill sets; that non-competes drive skilled workers outside of the Garden State at the end of employment contracts; and that non-competes are coercive and exploitative as they take advantage of employees’ unequal bargaining power with employers at the time of contracting, when workers are most vulnerable.

What’s in A.B. 3715?

A.B. 3715 bans employers from enforcing restrictive covenants against a wide category of employees, including:

  • Independent contractors
  • Employees employed for less than one year
  • Low-wage employees
  • Student interns
  • Individuals under 18
  • Seasonal or temporary workers
  • Nonexempt employees under the Fair Labor Standards Act
  • Employees fired for reasons other than misconduct

When allowed, restrictive covenants must be reasonable, in geographic and substantive reach. Enforcement would be limited to where the employee provided services, or had a material presence or influence for two years preceding termination. Employers cannot prevent New Jersey employees from working in other states, including New York, Pennsylvania, and Delaware. Restrictions on proscribed activities would be limited to specific services provided by the employee during the two years preceding termination. The bill frees up customers and clients to follow employees to new places of employment, as long as they are not solicited to do so. In the end, however, any restrictive covenant successfully engineered by an employer has a maximum life span of only 12 months post-termination.

A.B. 3715’s application broadly prohibits any employer agreement that waives an employee’s substantive, procedural or remedial rights under the act, any other act, administrative regulation, or common law. It bans no-poach agreements entirely, but it would not limit non-competes in business mergers or acquisitions.

Employers attempting to enforce a permitted restrictive covenant must jump through procedural hurdles and possibly pay out large sums of money to the employee. Employers must post a copy of A.B. 3715 stipulations in prominent work areas for employees to see, to avoid fines. To activate a restrictive covenant, the employer must give employees 30 business days’ written notice of its existence. To enforce, the employer must give employees a 10-day written notice of intent, post-termination. Failure to abide by these notification requirements automatically voids the restrictive covenant. Additionally, except for terminations for misconduct, an employer must continue to pay the departing employee 100% of his wages and benefits during the contracted non-compete period — even if that employee finds employment elsewhere.

Violating A.B. 3715 would be costly, too. The bill specifically empowers employees to sue employers for a period of two years from the event triggering the violation. Courts could (i) void the entire employment agreement; (ii) provide injunctive relief; and/or (iii) award for loss compensation, damages, reasonable attorney fees and liquidated damages of up to $10,000. The bill prohibits choice of law provisions that limit NJ employees’ right to bring suit. It knocks down any agreement penalizing an employee for defending against or challenging the validity or enforceability of a non-compete.

Gauging Conditions for New Jersey Employers

Before New Jersey employers take up arms against this home-grown proposal, they should note that A.B. 3715 presents a much kinder version than the non-compete ban being proposed by the FTC, which is broader in scope and, notably, retroactive in application. The proposed FTC rule bans any language in an employment contract “that prevents the worker [paid or unpaid] from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” The federal proposal would require employers to rescind existing non-compete clauses and notify workers that they are no longer in effect.

As the bill heads to the floor of the legislature, New Jersey healthcare employers should take heed of the changing winds in this area — both in New Jersey and at the federal level — and seek legal review of existing and future employment contracts.

If you have any questions about the employment agreements and non-competes, particularly in the healthcare setting, please contact us here.

  • Posted on: Mar 8 2023