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N.J. Noncompete Proposal Would Make Post-Employment Pay the Norm

Sept. 9, 2022, 9:00 AM

It isn’t often that an employer is required to keep paying workers who’ve left the company. But it’s one approach to restricting employee noncompete agreements that is up for consideration and facing stiff business opposition in the New Jersey legislature.

Continuing pay for former employees who are bound by noncompetes—a policy sometimes called “garden leave"—is a derivative of a common employment practice in the UK, and conditions could be right for the idea to expand in the US. Offering post-employment pay can have benefits not just for the workers but also for businesses, even if they’re loath to have it legally mandated, according to employment lawyers.

High on the list of benefits: paying a former worker during the noncompete period makes it much less likely a court would side with the worker if they challenge the noncompete as legally invalid. Noncompetes often remain in effect for one to two years after employment ends.

“The payment of money unquestionably makes it easier to enforce a noncompete,” said Russell Beck, an employment lawyer with Beck Reed Riden LLP in Boston.

As scrutiny of employee noncompete agreements spreads among state legislatures and courts, Beck said he’s seen a small uptick in companies opting to include garden leave in their agreements without a legal mandate for it, particularly in the financial services industry.

Garden leave also is sometimes used in contracts for sales professionals, as noncompetes covering those positions are often hotly contested with companies eager to protect client relationships, said Katie M. Connolly, an employment lawyer with Nilan Johnson Lewis PA, based in Minneapolis.

A few states require companies to continue partial or full pay for former employees bound by noncompetes in narrow circumstances, such as workers laid off for reasons unrelated to job performance in Nevada and Washington state. Oregon gives employers the option to pay garden leave if they wish to enforce a noncompete that otherwise would be barred under state law. Illinois requires ongoing pay for workers bound by noncompetes if they were laid off for reasons related to Covid-19.

The New Jersey bill (A3715) would require full pay plus benefits for former employees whenever a noncompete or other restrictive covenant is in effect.

Ripe for Expansion

While rare, the concept could be ripe for expansion through state mandates, more companies voluntarily including it in their employment contracts, or a combination of the two, Connolly said.

That’s because policymakers and courts are scrutinizing the use of noncompetes more closely, and the tight labor market is forcing employers to consider more employee-friendly policies to help attract talent, she said.

“It’s very expensive, but it serves a judicial and legislative purpose in that it forces employers to be more discerning about the people that they ask to sign noncompete agreements,” Connolly said.

Although often used in the US to refer to noncompetes, the term “garden leave” originated with a different kind of post-employment pay, Beck said. Employees in the UK often are contractually obligated to give a notice period before leaving their job. If the employer doesn’t want the employee on site after they’ve given notice, “the company will pay you to sit in your garden” instead, he said.

US employers frequently require workers to sign noncompetition agreements and other restrictive covenants as part of their new-hire paperwork, as a means of protecting company trade secrets, client relationships, and investment in employee training.

State lawmakers have restricted or banned the use of noncompetes specifically for low-wage or hourly workers in at least 11 states plus the District of Columbia. The income threshold for those bans ranges widely from $30,000 annually in New Hampshire to $100,000 or more in Colorado, D.C., Oregon, and Washington state. California, North Dakota, and Oklahoma ban noncompetes outright.

The issue also has caught the attention of federal policymakers, with President Joe Biden calling on the Federal Trade Commission to restrict or ban noncompetes and bipartisan legislation pending in Congress that would limit employers’ ability to use them with low-wage workers.

Negotiating Details in New Jersey

New Jersey’s proposal includes similar language as other states that have banned noncompetes for low-wage workers. But it goes further in several ways—including the garden leave requirement and the limits on other types of restrictive covenants, such as no-poach agreements in which businesses agree not to hire each other’s employees and non-solicitation agreements in which workers agree not to recruit away their employer’s customers or other workers soon after leaving the company. It also would cap the length of any restrictive covenant at 12 months following the end of employment.

As introduced, the bill would require garden leave for former employees whenever a noncompete is in effect, even if they left the company voluntarily and took another job. That notion drew sharp criticism from business advocates at a May hearing where the state Assembly’s labor committee approved the bill.

“Large employers who can’t fund that entitlement for high-income employees and still provide them with competitive comp will seek other states for those positions to remain competitive in a national labor market,” Anthony Anastasio, president of the New Jersey Civil Justice Institute, told the committee in May. “There’s no good reason to provide a windfall to high-income employees who resign and immediately find new work that’s not covered by a restrictive covenant. That makes no sense.”

The bill could undergo revisions before it gets an Assembly floor vote, as the bill sponsor acknowledged he’s still listening to the opposition from business owners and talking through the details. It awaits at least one more committee hearing before it’s ready for a floor vote.

“There are a lot of concerns, which I understand,” said New Jersey Assemblyman Paul D. Moriarty (D), a sponsor of the bill.

“I would like to give some power back to employees who are often unfairly restricted,” he said. “Why should a company be able to stop someone from working or force them to move to gain employment in their field?”

To contact the reporter on this story: Chris Marr in Atlanta at cmarr@bloomberglaw.com

To contact the editors responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; Genevieve Douglas at gdouglas@bloomberglaw.com