Some Democratic legislators have come up with a plan to get more New Jerseyans off the unemployment rolls by voiding restrictive covenants that impede their job searches.
A bill introduced this month would prevent businesses from enforcing such covenants against former employees — at least those who qualify for unemployment benefits and as such were not terminated for cause.
The measure, A-3970, would apply to agreements not to compete with former employers, solicit their customers or personnel or disclose information, but only agreements entered into after the legislation takes effect.
The chief sponsor, Assemblyman Peter Barnes, D-Middlesex, says the idea behind the bill was to eliminate an obstacle to finding jobs, given the continued high rate of unemployment.
New Jersey was at 9.0 percent in March, down from last summer’s high of 9.7 percent but still far higher than before the start of the recession in 2008, when it was below 5 percent. The national rate for March was 7.6 percent.
Barnes says the rationale for the link to unemployment eligibility was that workers laid off, downsized or terminated through no fault or wrongdoing of their own, and thus able to collect unemployment benefits, should not be held to a restrictive covenant when it is already difficult enough to find work.
"Anything that makes the job search more difficult we should be getting away from," he says. "This bill would go a long way to help people restricted by employment covenants," which are more and more frequent, he adds.
In contrast, people not allowed to collect the benefits, who would thus not be protected by the law, might have engaged in some type of precluded conduct, he notes.
Under existing law, judges tend to scrutinize restrictive covenants and decline to enforce them if they are too restrictive. Barnes says that can be a time-consuming and costly process, especially for someone who is unemployed.
He says he is optimistic that the bill will get a hearing before the Assembly Labor Committee, which is chaired by co-sponsor Joseph Egan, D-Middlesex. Another co-sponsor, Wayne DeAngelo, D-Mercer, is a member.
The idea for A-3970 came from a similar bill introduced in Maryland, which is meeting strong resistance.
Maryland Senate Bill 51, introduced Jan. 9, received an unfavorable report from the Maryland Senate Finance Committee. That state’s Department of Legislative Services concluded that it could reduce unemployment expenditures by reducing the duration of benefits for some, but the impact was expected to be minimal. It also found a possibly "meaningful" effect on small businesses that could be hurt by increased competition from former employees or positively impacted if they are able to obtain more skilled employees.
Barnes acknowledges that the bill might need to be tweaked and he is "always willing to sit with various business groups who may have concerns." For example, he mentions that he would not want the law to apply in a situation where a high-ranking employee "leaves with trade secrets or information that would cause severe economic hardship" to the former employer.
The bill is already arousing criticism. Jed Marcus, president of the Academy of New Jersey Management Attorneys, circulated an advisory calling the bill "a serious body blow to employers trying to protect their businesses, customer bases, confidential information and trade secrets."
Marcus, of Bressler Amery & Ross in Florham Park, further warned that A-3970 might protect not just terminated employees but some who resign because they can receive unemployment benefits if they left "for good cause attributable to work."
That could set up a conflict between the courts and those who administer the unemployment program. What might be deemed resignation under the contract might be viewed differently under the unemployment statute which is supposed to be liberally construed, he points out.
Marcus sees "no rational nexus" between unempoyment eligibility and enforcement of covenants, asking why should being laid off release someone from an obligation not to disclose trade secrets or other confidential information.
He also predicts that if the law is enacted, employers will be more likely to contest unemployment benefits to preserve covenants.
He recommends that employers review the agreements they already have in place and, "where appropriate, get employees to sign covenants now, before any change in the law occurs."
Another management-side lawyer, Michael Rich of Porzio Bromberg & Newman in Morristown, calls the law overbroad and indiscriminate in contrast to the case-by-case approach currently used by courts in enforcing the restrictions. He notes that an ex-employee who harms a former employer by exploiting trade secrets could put additional people out of work.
Taking a contrary view is Richard Schall of Moorestown’s Schall & Barasch, who represents employees. He says he has had clients lose jobs and stay on unemployment longer due to noncompete agreements and would like to see New Jersey refuse to enforce them as a matter of public policy.
They can "create incredible hardship" for someone who finds a new job and then the new boss gets a letter saying fire them or be sued on account of a noncompete covenant, says Schall.
Another lawyer for employees, Alan Schorr of Cherry Hill, a chairman of the Legislative and Public Policy Committee of the National Employment Lawyers Association-New Jersey, says noncompetes are "always contacts of adhesion" and "extremely unfair and oppressive to employees."