By Jessica Mendelson and Robert Milligan

New Jersey state legislators recently proposed A3970, a bill designed to prevent New Jersey businesses from enforcing “non-compete agreements with staffers who can claim unemployment compensation.”

The bill, which is sponsored by Assembly members Joseph Egan and Peter Barnes, was recently referred to the state’s Assembly Labor Committee. If the bill passes, it would invalidate contracts or agreements “not to compete, not to disclose or not to solicit” in cases where individuals qualify for state unemployment benefits. The changes would not apply to preexisting contracts. Theoretically, the bill would eliminate obstacles for workers on unemployment to return to work, thus reducing benefit payments and, by extension, unemployment taxes on employers. However, the legislation will likely face opposition from employers who rely upon non-compete agreements to protect legitimate business interests such as trade secrets and confidential information.

Traditionally, New Jersey courts enforce restrictive covenants if they are reasonable in scope and duration.  In determining whether a non-compete covenant is reasonable, New Jersey courts use a three-prong test, where an employer must show the restriction is necessary to protect the parties’ legitimate interest, that the restriction does not cause undue hardship for the former employee, and is not against the public interest. Under existing law, impacted employees are already able to apprise New Jersey courts of their unemployment status in opposing the enforcement of non-compete agreements.

If A3970 passes, it will further limit the enforceability of non-compete agreements in New Jersey. The state currently has a 9.3 percent unemployment rate, which has led to increased proposals for legislation pertaining to jobless benefits. Given this high rate of unemployment in New Jersey, the passage of the bill will make it harder for employers to enforce non-compete agreements against former employees.

New Jersey is hardly the first state to consider such a change to its non-compete law. In fact, the Maryland state Senate considered passing a similar bill earlier this year. We will continue to keep you apprised of significant proposed changes in trade secrets and non-compete law as they emerge.