Should You Sign a Non-Compete Agreement?

Formerly limited to high-level corporate employees, non-compete agreements are becoming a standard part of the pre-employment or onboarding packet for an increasing number of workers. In some situations, these contracts—also called “restrictive covenants”—can provide benefits for both an individual and their employer. However, companies often issue these restrictive covenants without negotiation to lower-wage and lower-level employees, for whom they provide little benefit and a potentially significant burden. How can you tell whether a non-competition agreement will be valuable or detrimental to your situation?

Non-Compete Agreements in New Jersey: The Basics

A non-compete agreement prohibits an employee from engaging in current and/or future business activities that compete with their employer's business. These agreements are designed to safeguard an employer’s trade secrets and other sensitive information as well as protect its competitive interests, encouraging a business to invest time and money into its workers without fearing a competitor will poach them away.

State laws governing these sorts of agreements vary wildly. Some areas allow them generally, so long as they are appropriately limited in scope and duration for the employee in question. Others broadly discourage them, limiting their allowability to very specific groups of employees in very specific circumstances. As a whole, however, states share the premise that such agreements are not intended to discourage free trade, impair workers from continuing to work in their profession as a punishment for leaving an employer, or hold a worker hostage to a company for fear of losing their livelihood.

In New Jersey, an agreement “will be given effect if it is reasonable under all the circumstances of [the] particular case,” and “simply protects the legitimate interests of the employer, imposes no undue hardship on the employee, and is not injurious to the public.”[1] Customer relationships or goodwill, confidential business information, and trade secrets are examples of protectable interests; merely preventing competition from employees or other businesses is not a “legitimate” interest.[2] When determining whether an agreement is legally enforceable, a New Jersey court will balance the value of protecting an employer’s legitimate interests against the burden on the employee to find work in their field or other ways in will have a negative impact.[3]

How a Non-Compete Can Be a Win-Win Situation

In certain situations, companies entrust workers with significant institutional knowledge, which may include “the secret recipe” for the company’s success (either literally, in the form of patents and formulas, or metaphorically, in the sense of unique ways of doing business, novel business ideas, or customer data).

In situations where protecting these interests is significantly valuable, entering into non-compete agreements with key employees who safeguard these interests may be an effective tool. In such situations, employers often compensate these valuable workers generously for making a commitment to the company and, in turn, ask them to give up some of their freedom to leave at any time and work elsewhere. If this describes your potential employment relationship, a non-competition agreement may provide valuable leverage in your compensation negotiations.

One factor that significantly increases the chances that a court will find a non-competition agreement fair, enforceable, and reasonable is whether it fairly compensates the employee for their loss of opportunity.

For example, an agreement could provide that an employee receives severance pay in an amount equal to or greater than what they would have earned during the time they are restricted from working: in exchange for an employee’s agreement to refrain from working in the same industry for two years after leaving company X (not competing with company X or otherwise helping its competitors), company X agrees to pay him the equivalent of two years’ salary on the date of his separation. This agreement would safeguard the company’s interests in preventing the individual from competing while still protecting his financial well-being.

You can and should negotiate the terms of any proposed non-competition agreement and consult with an experienced employment attorney for guidance. You may be able to rewrite the scope and breadth of an agreement or obtain additional compensation in exchange for your concessions.

When NOT to Sign a Non-Competition Agreement

Unfortunately, many companies have begun to issue non-competition agreements as a matter of course to low-wage workers who don’t have access to the kind of information or specialized knowledge that is a “legitimate interest” protectable by law. While several courts have recently refused to enforce agreements in these circumstances, holding that they are against public policy, defending against a lawsuit can be time consuming and costly. Don’t sign a non-compete agreement assuming it will be unenforceable, however; New Jersey courts have the ability to rewrite an overboard, unenforceable restriction in a more tailored, narrow, and appropriate way so it is enforceable rather than throwing it out entirely (referred to as “blue penciling”).

The individualized approach that the courts take to these cases means that there is no objective answer to whether a particular agreement is valid in New Jersey; the outcome of each case depends on whether a court believes a particular agreement is reasonable in the circumstances. If your employer presents you with a non-competition agreement before or during your employment and you feel it is unenforceable, unfair, or inappropriate to your situation, you should consult with an experienced employment attorney before signing.

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[1] Solari Indus. v. Malady, 264 A.2d 53, 56 (N.J. 1970).

[2] Coskey's Television & Radio Sales & Serv., Inc. v. Foti, 602 A.2d 789, 794 (N.J. Super. Ct. App. Div. 1992).

[3] Community Hosp. Group v. More, 869 A.2d 884, 898 (N.J. 2005).