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RESTRICTIVE COVENANTS

Added on 12/08/2016 by kalsonlaw

Your employer may present you with a Restrictive Covenant or Non-Disclosure/Non-Compete Agreement which you will be asked to sign as a condition of employment. Basically, the agreement seeks to prevent an employee from engaging in a similar type of job or profession or working for a competitor. Employer’s demand this type of clause based on the fear or possibility that upon termination or resignation, an employee might start working for a competitor, start a similar business and gain competitive advantage by using confidential information about their previous employer. Such information may include trade secrets, confidential information and client relationships, etc. An over-broad clause may severely limit or prevent an employee from finding work elsewhere. The Agreement can be presented to an employee upon hire, during the course of employment or at the end as part of a severance package.

In New Jersey, the seminal case setting forth the delicate balancing necessary to enforce restrictive covenants is Solari Industries, Inc. v. Malady, 55 N.J. 571 (1970). Solari sets forth the basic principle that restrictive covenants are enforceable only to the extent that they are reasonable under the circumstances. Generally, the court considers three factors to determine whether a restrictive covenant is reasonable: whether the agreement 1) is necessary to protect the employer’s legitimate interests; 2) causes undue hardship on the former employee; and 3) impairs the public interest. Courts applying the Solari test balance the competing interest found in the first and second prongs of the test, and weigh the impairment of the public interest, if any, in the resolution of the dispute.

In evaluating whether a restrictive covenant imposes a hardship on the employee, courts will generally focus on two aspects of the restraint: 1) its geographic scope, and 2) the time period for which the restraints will be in effect. In considering whether the geographic scope of a non-compete agreement imposes an undue hardship, courts consider “the likelihood of the employee finding work in his field elsewhere” and whether the employee ended the employment relationship, thus bringing the hardship on him or herself. Courts in New Jersey will modify or “blue pencil” the agreement if it is determined to be over-broad. The case of an employee who is fired for no reason is viewed much differently than an employee who takes customers and trade practices then opens a competing business.

I recently had a case where the employee worked in a very specialized industry as a Sales Executive. He was presented with a Severance Agreement. In reviewing the agreement, there was a restrictive covenant which was over-broad and would have prevented him from securing a Sales position in the United States and Canada for any company that manufactures or distributes motors, pumps or fans. The employee did not possess any trade secrets or confidential information. I was successful in negotiating modifications to the clause so that he could obtain new employment.

We review Severance Agreements, Contracts and Restrictive Covenant Agreements that may prevent you from earning a living after you are no longer employed with a company. It is imperative that you understand what you are signing. An experienced Employment and Labor attorney can negotiate on your behalf. Before signing an agreement, consult an attorney.