A Proposed New Jersey Bill Seeks to Limit Employers' Rights To Bind Employees To Restrictive Covenants

Earlier this month, the New Jersey Assembly introduced a new bill (Assembly Bill No. 3970) that proposes to invalidate non-competition, non-solicitation and confidentiality covenants of individuals who qualify for unemployment compensation. The bill does not seek to nullify covenants already in effect, merely those entered into after the date of the bill’s enactment. By permitting individuals subject to restrictive covenants to seek employment, the bill aims to reduce the State’s unemployment benefits expenditures.

Presently, New Jersey courts approve of restrictive covenants in employment contracts if they are reasonable. To be reasonable, they must protect the employer's legitimate interest, must not cause undue hardship for the former employee, and cannot be against the public interest. If passed, the bill would significantly limit employers’ ability to bind their employees to such restrictive covenants and potentially leave them without means to protect valuable confidential information and customer contacts.

With the introduction of the bill, New Jersey follows in the footsteps of Maryland, which proposed legislation on January 9 to bar non-compete covenants of those individuals who receive unemployment insurance benefits. Like the Maryland bill, the New Jersey bill has been referred to committee.