Are restrictive covenants enforceable in New Jersey?
Restrictive covenants are enforceable in New Jersey when they are reasonable. The court uses a three-part test to determine when these covenants are reasonable.
A restrictive covenant is an agreement between an employer and employee that prohibits the employee from doing certain things in the event that the employee leaves the employer. In some cases, the restrictive covenant will forbid employees from going to work for competitors for a certain period of time. In other cases, a restrictive covenant prohibits employees from contacting the employer’s customers after leaving the employer. Restrictive covenants are becoming more common as employers strive to protect information about their businesses and the investments that they have made in employees. Before signing a restrictive covenant, employees in New Jersey should understand when these covenants are enforceable.
When are restrictive covenants enforceable?
New Jersey does not have a statute governing restrictive covenants, but the courts will enforce these covenants if they are reasonable in duration, territory and scope. The test for determining whether a covenant is reasonable is whether the covenant:
- Protects the employer’s legitimate business interest
- Does not impose undue hardship on the employee
- Is not contrary to public interest.
In New Jersey, the employer has the burden of proof to show that the restrictive covenant is reasonable.
When is a restrictive covenant reasonable?
Some of the business interests that an employer may legitimately protect with a restrictive covenant include trade secrets, intellectual property, customer relationships and confidential information about the business. When assessing whether a restrictive covenant imposes an undue hardship on an employee, the court will weigh how likely it is that an employee will find other work in his or her field and the burden of the restriction on the employee.
The court also considers whether restricting competition will hurt the public by reducing access to services. For example, the court once had to weigh a hospital’s right to protect its referral base by preventing a neurosurgeon leaving the hospital from working in the area against the public’s need to have access to the neurosurgeon’s skills in an area where there was a shortage of that type of doctor.
Who can help with further questions?
As restrictive covenants become even more prevalent, it is more likely that employees will encounter these covenants. Employees who have questions about restrictive covenants should consult with a skilled business law attorney prior to entering into any agreements with employers. If you are facing an issue pertaining to an existing restrictive covenant, speak with an experienced business law attorney who can advise you about your specific concerns.
Keywords: restrictive covenants; intellectual property; trade secrets