On Wednesday, February 24, 2021, the Assembly Labor Committee heard testimony on a sweeping bill that all but prohibits employers’ use of restrictive covenants from a practical perspective. Among other things, the bill requires employers to provide 100% pay and continue contributions to fringe benefits for former employees during the duration of a restrictive covenant (also known as “garden leave”); bans enforcement of restrictive covenants against independent contractors; prohibits application of restrictive covenants against former employees when customers solicit an employee or otherwise initiate contact; limits the duration of all restrictive covenants to one year; and creates a new cause of action for employees, including liquidated damages and a right to seek attorneys’ fees and costs.
NJCJI’s President, Anthony Anastasio, offered detailed testimony in opposition to this bill. First, NJCJI requested that the bill be amended to explicitly state that lawful provisions of restrictive covenants remain severable and that our courts can still blue pencil these agreements as a matter of equity. In its current form, the bill casts doubt on courts’ ability to do so.
Next, NJCJI addressed the garden leave requirement for all restrictive covenants, arguing that this entitlement will depress wages for New Jersey workers among other unintended consequences. NJCJI requested that this entitlement either be deleted or amended to only apply to low-wage employees.
NJCJI also argued for deletion of the provision that allows former employees to engage customers of their former employer if the customers initiate first contact. NJCJI highlighted the obvious consequence of a flood of litigation over backdoor solicitations by former employees who disingenuously seek protection under this provision.
Then, NJCJI argued for deletion of the provision that bars enforcement of restrictive covenants against independent contractors. This provision will create the obvious consequence of prohibiting protection of proprietary information from misappropriation in business-to-business transactions involving subcontractors.
Further, NJCJI argued against the imposition of a 12-month limit on the duration of restrictive covenants, which completely disregards the practical realities of different industries in New Jersey’s diverse economy. Using drug manufacturers as an example, NJCJI stressed the fact that our courts are perfectly capable of using their equitable powers to ensure that durations are fair and reasonable in each unique set of circumstances.
Finally, NJCJI argued that the liquidated damages provision would result in a flood of class action lawsuits based on technical violations of the bill’s detailed requirements. That is, any such violation could theoretically sustain an action for liquidated damages since those damages can be sought regardless of actual harm.
Supporters of the bill then offered testimony laden with hyperbole and mischaracterization of the bill’s actual written requirements. After only a few short questions, the Committee voted to release the bill with no amendments, on party lines.
NJCJI is currently arranging to meet with the sponsor of this bill to further press its concerns before a full Assembly vote. Please email Anthony if you would like to discuss this legislation.
A copy of NJCJI’s written testimony can be found below. A link to Anthony’s oral testimony can be found here. A1650 starts at the 11:50 mark and Anthony’s testimony can be heard at the 21:30 mark.