by Caroline Hardig, Associate Member, University of Cincinnati Law Review Vol. 91
Is it the end for non-competes in the United States? Recently more and more states have taken steps to restrict non-competes.1See Ian T. Clark-Fisher & Leslie J. Levinson, The Ever-Changing Landscape of Non-Compete Agreements- Recent Developments, XI Nat’l L. Rev. 271 (2021), https://www.natlawreview.com/article/ever-changing-landscape-non-compete-agreements-recent-developments. In New Jersey’s attempt, the Legislature has proposed a bill that would require an employer to pay terminated employees who are bound by non-competes their full salary and benefits for the entire restricted period. In Part II, this Article will discuss how non-competes are treated in New Jersey and what the proposed bill entails. Part III will discuss implications of restricting non-competes and the effects of mandated post-employment pay.
A non-compete agreement is an employment contract that “prohibits the employee from competing with the business directly or indirectly for a specific duration of time after their employment has ended.”25 Things You Need to Know About Non-Compete Agreements, Thomson Reuters (Mar. 11, 2022), https://legal.thomsonreuters.com/en/insights/articles/the-basics-of-non-compete-agreements. Typically, employers use non-compete agreements to protect their business by restricting their employee from working for a competitor. Non-competes are also used to protect client relationships and to give employers an incentive to invest in employee training.3Id.
Recently, more and more states have tried restricting the use of non-compete agreements through legislation. Critics of non-competes assert that these agreements limit job mobility and innovation.4Najah A. Farley, How Non-Competes Stifle Worker Power and Disproportionately Impede Women and Workers of Color, Nat’l Emp. L. Project (May 18, 2022), https://www.nelp.org/publication/faq-on-non-compete-agreements/. One of these critics, President Biden, called on the Federal Trade Commission, to restrict non-competes.5Chris Marr, N.J. Noncompete Proposal Would Make Post-Employment the Norm, Bloomberg L. (Sept. 9, 2022) https://news.bloomberglaw.com/daily-labor-report/nj-noncompete-proposal-would-make-post-employment-pay-the-norm. In addition, bipartisan legislation has introduced laws restricting non-competes specifically for low-wage workers, and so far, eleven states have attempted to protect low-wage workers by restricting or banning non-competes.6Id.
This section explores one recent state’s attempt to restrict non-competes by examining New Jersey Assembly Bill 4715, and then explains the difference between post-employment pay in the context of non-compete agreements and the concept of “garden leave.”
A. New Jersey’s Proposed Bill to Restrict Non-Competes
Under current New Jersey law, a court will only enforce a non-compete if three factors are met: (1) its terms are reasonably necessary to protect an employer’s business interests; (2) it does not cause undue hardship to the employee; and (3) it does not impair the public interest.7James Yu, New Jersey Introduces Proposed Legislation Limiting Use and Enforceability of Non-Compete and Non-Solicitation Agreements, JD Supra (July 29, 2022). https://www.jdsupra.com/legalnews/new-jersey-introduces-proposed-7528768/. Regarding whether its terms are reasonable, courts typically look to the geographic scope and time limitations of the agreement to ensure the employee has not been unduly burdened by the scope of the agreement.8Id.
On May 2, 2022, New Jersey legislators introduced Bill A3715 (the “Bill”) following the recent trend states have followed in restricting the scope and use of non-compete agreements.9Id. The Bill aims at codifying existing common law doctrine that prohibits unduly burdensome non-compete agreements.10Id. The Bill lists different types of workers who cannot have a non-compete agreement enforced against them, including seasonal or temporary employees, independent contractors, employees under the age of eighteen, and “low-wage” employees–groups that are typically the most vulnerable to non-compete agreements.11Id. Not only does the Bill exempt various types of workers, but it also imposes requirements on employers who choose to use non-compete agreements. For example, the employer must inform the employee of the terms of the non-compete thirty days prior to the start of employment, the length of the non-compete cannot be greater than twelve months, the geographic scope of the non-compete must be limited to the “specific territory and services of the employee,” and the agreement cannot ban work outside the state.12Id.
For employees who enter a non-compete agreement, the Bill requires employers to pay the employee after they leave the company. This trend in post-employment pay would mandate an employer to pay the employee “100 percent of the pay which the employee would have been entitled for work that would have been performed during the period proscribed.”13Id.
B. Post-Employment Pay vs. Garden Leave
While some refer to the term “garden leave” for post-employment pay in the context of non-compete agreements, true garden leave is different. Garden leave originated in the United Kingdom, where it is a common practice used by in employers.14Marr, supra note 5. Often in the United Kingdom, employees are required to give their employer extended notice before leaving a job.15Id. If the employee gives their employer notice and the employer decides they do not want the employee to finish out their employment, the employer would pay the employee to “sit in your garden.”16Id. This trend of post-employment pay has begun in the United States when an employee bound by a non-compete is terminated. While post-employment pay would be mandated in New Jersey under the proposed Bill, some employers already have implemented garden leave policies in certain industries like the financial services industry.17Id.
The difference between traditional garden leave and post-employment pay mandated by non-compete agreements is that under garden leave policies, the employees are still technically employed by their company; they have given notice of their resignation and are often relieved of their duties as employees.18Peter A. Steinmeyer & Lauri F. Rasnick, Garden Leave Provisions in Employment Contracts, Thomson Reuters (May 2017), https://www.ebglaw.com/wp-content/uploads/2017/05/Thomson-Reuters-Rasnick-Steinmeyer-May-2017.pdf. Contrastingly, in traditional non-compete agreements, employment is completely terminated. While traditional garden leave may have the same effect as a non-compete agreement, since those bound by garden leave are still technically employed and cannot go work for another company, traditional garden leave is different from a non-compete agreement with mandated post-employment pay, even though the terms may often be conflated.19Id.
Business leaders argue that non-compete agreements are essential to protect their trade secrets.20Edward Segal, How Biden’s Proposed Ban On Non-Compete Agreements Would Impact Companies, Forbes (July 9, 2021, 9:04 AM), https://www.forbes.com/sites/edwardsegal/2021/07/09/how-bidens-proposed-ban-on-non-compete-agreements-would-impact-companies/?sh=b4dd31774e0d. A complete ban on non-compete agreements would substantially impact “businesses whose success is built on trade secrets, such as customer lists, secret recipes, or other proprietary methods.”21Id. While non-compete agreements have an important purpose for high level employees, they should be restricted or banned for low-wage workers. Where non-competes do exist, states should not mandate post-employment pay.
A. States Should Restrict Non-Competes for Low-Wage and Hourly Workers
Many states are heading in the right direction regarding limiting or restricting non-competes for low-wage workers. Advocates for low-wage workers argue that low-wage and hourly workers who are bound by non-compete agreements are unable to move jobs easily, which hinders advancement by preventing these workers from seeking better paying jobs.22Chris Marr, Employee Noncompete Clause Limits Adopted by Three More States, Bloomberg L. (June 29, 2021, 5:30 AM), https://news.bloomberglaw.com/daily-labor-report/employee-noncompete-clause-limits-adopted-by-three-more-states?context=article-related/ Low-wage workers typically do not have access to trade secrets or highly sensitive information that the employer would want to protect by implementing the non-compete, so the implementation of a non-compete agreement can be overly restrictive.
One concern with restricting non-competes for low-wage and hourly workers is how states define a low-wage worker. For example, New Hampshire defines low-wage as an “income less than two times the federal minimum wage.”23Marr, supra note 5. However, Oregon and Washington’s threshold for low-wage is around $100,000 per year.24Id. With states defining low-wage workers differently, companies who do business in multiple states could have contrasting standards for the same type of employees. If there was a universal definition of low-wage, all low-wage workers could be protected, no matter where they live. More states should head in the direction of limiting or banning non-compete agreements for low-wage and hourly workers because job mobility is essential for these workers.
B. States Should Not Mandate Post-Employment Pay in Non-Competes
The goal for mandating post-employment pay is to limit the use of non-compete agreements even further. Post-employment pay would require employers to discern how many employees they want to sign non-compete agreements. Employment lawyers have noted that a benefit of post-employment pay for employers is that a court is much more likely to side with an employer if an employee argues the non-compete is unenforceable, since the employer paid the employee during the entire non-compete period.25Id.
However, states should not mandate post-employment pay in non-compete agreements. While this pay would have important benefits in restricting non-compete agreements, some businesses will suffer from the mandate. For example, small business and start-ups do not have the same resources as large companies have to protect their trade secrets and client relationships. If a small business cannot afford to pay a high-level employee as part of the non-compete, then the business may not be able to fairly compete in the national labor market.26Id.
In addition, unlike the tradition garden leave—where an employee is getting paid, but still technically an employee of their company—with this mandate, an employee would be getting paid from their previous employer, while still being free to find new employment that was not restricted by the non-compete agreement. Anthony Anastasio, President of the New Jersey Civil Justice Institute, told the State’s Assembly Committee that “[t]here’s no good reason to provide a windfall to high-income employees who resign and immediately find new work that’s not covered by a restrictive covenant.”27Id.
If post-employment pay is mandated, then employers would need to balance how important it is for them to protect that employee’s knowledge of trade secrets and other important information shielded by the non-compete agreement. If that employee’s information is worth protecting at all costs, then it may be crucial to pay the employee their full salary plus benefits for the entire period.
C. Looking Forward
With more states limiting non-competes, employers will have to look for other ways to protect their information. Employers could implement confidentiality agreements or non-disclosure agreements, which would prevent employees from sharing trade secrets with subsequent employers.28Alternatives to Non-Competes with Employees, Morgan & Westfield, https://morganandwestfield.com/knowledge/alternatives-to-non-competes-with-employees/ (last visited Sept. 23, 2022). Not only does a non-disclosure agreement protect a company’s trade secrets, but it can also protect customer names, intellectual property, and financial information.29Id. A non-disclosure would allow a company to protect its trade secrets and other highly important information, without burdening the employee’s mobility in the labor market.
The trend of limiting non-compete agreements will most likely continue to emerge throughout the United States. With New Jersey mandating post-employment pay as one of its limitations on non-competes, more states may follow with similar provisions, depending on the success of the legislation. Since this is a newer trend in the United States compared to the United Kingdom, more courts will likely address the legality of the topic in the future.30Steinmeyer & Rasnick, supra note 18.
While states should limit or ban non-compete agreements for low-wage workers, they should not be banned entirely for higher-level employees with access to sensitive information. Further, mandated post-employment pay is too restrictive for employers who must implement a non-compete. If more states enact legislation restricting non-competes, businesses will need to think more critically about which employees they want to enter a non-compete agreement with, especially if they are required to pay employees for the entire non-compete period once their employment is terminated.
- 1See Ian T. Clark-Fisher & Leslie J. Levinson, The Ever-Changing Landscape of Non-Compete Agreements- Recent Developments, XI Nat’l L. Rev. 271 (2021), https://www.natlawreview.com/article/ever-changing-landscape-non-compete-agreements-recent-developments.
- 25 Things You Need to Know About Non-Compete Agreements, Thomson Reuters (Mar. 11, 2022), https://legal.thomsonreuters.com/en/insights/articles/the-basics-of-non-compete-agreements.
- 4Najah A. Farley, How Non-Competes Stifle Worker Power and Disproportionately Impede Women and Workers of Color, Nat’l Emp. L. Project (May 18, 2022), https://www.nelp.org/publication/faq-on-non-compete-agreements/.
- 5Chris Marr, N.J. Noncompete Proposal Would Make Post-Employment the Norm, Bloomberg L. (Sept. 9, 2022) https://news.bloomberglaw.com/daily-labor-report/nj-noncompete-proposal-would-make-post-employment-pay-the-norm.
- 7James Yu, New Jersey Introduces Proposed Legislation Limiting Use and Enforceability of Non-Compete and Non-Solicitation Agreements, JD Supra (July 29, 2022). https://www.jdsupra.com/legalnews/new-jersey-introduces-proposed-7528768/.
- 14Marr, supra note 5.
- 18Peter A. Steinmeyer & Lauri F. Rasnick, Garden Leave Provisions in Employment Contracts, Thomson Reuters (May 2017), https://www.ebglaw.com/wp-content/uploads/2017/05/Thomson-Reuters-Rasnick-Steinmeyer-May-2017.pdf.
- 20Edward Segal, How Biden’s Proposed Ban On Non-Compete Agreements Would Impact Companies, Forbes (July 9, 2021, 9:04 AM), https://www.forbes.com/sites/edwardsegal/2021/07/09/how-bidens-proposed-ban-on-non-compete-agreements-would-impact-companies/?sh=b4dd31774e0d.
- 22Chris Marr, Employee Noncompete Clause Limits Adopted by Three More States, Bloomberg L. (June 29, 2021, 5:30 AM), https://news.bloomberglaw.com/daily-labor-report/employee-noncompete-clause-limits-adopted-by-three-more-states?context=article-related/
- 23Marr, supra note 5.
- 28Alternatives to Non-Competes with Employees, Morgan & Westfield, https://morganandwestfield.com/knowledge/alternatives-to-non-competes-with-employees/ (last visited Sept. 23, 2022).
- 30Steinmeyer & Rasnick, supra note 18.