Restrictive covenants in the COVID era

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Of the approximately 100,000 people who remain out of work in New Jersey due to the COVID pandemic, around 20,000 are likely bound by non-compete agreements according to “Noncompete Agreements in the U.S. Labor Force,” a paper published in the Journal of Law & Economics in 2019.

With unemployment finally starting to decline, people are looking at the contracts they signed with their prior employer, and some are taken off guard by what they find.

“You’d be shocked at how many people I talk to that don’t remember what they signed and never kept copies of it.

When the job is ending, they’re reminded what they signed,” Einhorn Barbarito Frost & Botwinick employment law partner Andy Berns said. “It’s really important for people to be aware of a non-compete at the time of the hire and how it may impact them at the end of the employment.”

New Jersey courts tend to disfavor non-competes, but they’re enforceable as long as they protect an employer’s legitimate interests, impose no undue hardship on an employee, and are in the public interest. In the ongoing pandemic and post-pandemic market, the last factor is of note.

“One could certainly argue in the time of the pandemic that it’s in the public interest for people to be able to find suitable employment,” Berns said. “Since that’s a goal of society it may give courts more latitude to strike the requirements of a restrictive covenant in order to satisfy public interest.”

Non-competes are one of three types of restrictive covenants employees might sign, along with non-solicitation agreements and non-disclosure agreements. Berns said he believes New Jersey courts are going to be more critical of restrictive covenants moving forward and more likely to modify them through blue penciling, where a court voids some portions of a contract and finds other parts enforceable, modifying the contract to make it less restrictive.

“In my opinion, the courts [will make] it clear that there is a public interest in keeping people employed when unemployment is so high,” Berns said.

Employee termination doesn’t nullify restrictive covenants in New Jersey. A former employer, even one that laid someone off due to the COVID-19 pandemic, can still use a restrictive covenant against the former employee.

However, Assembly Bill 1650, which recently passed the Assembly labor committee, would significantly limit the scope and enfor-ceability of non-competes in New Jersey, including making them unenforceable with employees who were laid off.

“It’s a good piece of legislation because it would take the teeth out of a lot of restrictive covenants. The proposed legislation limits duration of non-competes to 12 months, whereas under current law up to two years is reasonable. Most importantly, it would require the employer to pay an employee 100% of the pay that they would have gotten for that period of time,” explained Curcio Mirzaian Sirot employment practice chair Frank Custode.

However, New Jersey Civil Justice Institute President Anthony Anastasio testified before the committee that the legislation is flawed, noting that the 12-month limitation “completely disregards the unique realities of employment in different industries.”

“For instance, highly skilled employees may make significant contributions to the development of important prod-ucts, such as pharmaceutical drugs, that take well over a year to bring to market,” Anastasio said. “Employers may have legitimate interests in protecting proprietary information used in the development of such products for longer than 12 months after an employee moves on to other employment.”

Anastasio testified that the bill should be modified to apply only to low-wage workers, who are most typically hurt by non-compete agreements. “To the extent that low-wage workers lack resources to litigate such disputes, a ban on inherently oppressive restrictive covenants for such workers may be sound public policy. But A1650 goes much further than just addressing that issue, effectively throwing out the baby with the bathwater,” he said.

Employers whose former employees violate restrictive covenants can sue the employee and subsequent employer as recourse, Berns said, and it’s important to act quickly. “You can’t necessarily wait for a lawsuit to be played out over the next couple of years. Frequently, these things are dealt with by temporary restraining orders and preliminary injunctions. Go to the courts and say, ‘look there will be irreparable harm to the company and we can’t wait for the lawsuit to play out, and we want you to evaluate immediately,” Berns said.

A temporary restraining order and preliminary injunction could potentially be converted to a permanent injunction while the lawsuits move forward, he added.

For a business hiring an employee subject to a non-compete with his or her previous employer, “it’s a discussion with legal counsel to determine whether or not bringing that person aboard is worth legal action,” Custode said.

Companies don’t always enforce restrictive covenants. “If a company ever enforced every restrictive covenant signed by their employees, their legal fees would be astronomical,” Custode said. “In my experience companies generally initiate litigation only if a person can really damage their business.”

“In my experience companies generally initiate litigation only if a person can really damage their business.”
– Frank Custode