When an employee leaves a job, either by their own decision or their employer’s, their ability to get another job in the same field might depend on whether they signed a non-compete agreement with their most recent employer. This type of agreement limits workers’ employment options, arguably to protect the employer’s business. Workers might sign a non-compete agreement as part of their original employment contract or at a later date. New Jersey employment law restricts the enforceability of these agreements, but a new rule from the Federal Trade Commission (FTC) might go much further than state law. The FTC published a final rule in late April 2024 that bans most non-compete agreements nationwide. The rule has not taken effect yet, and it will face legal challenges that could delay its effective date.
What Is a Non-Compete Agreement?
A non-compete agreement is a contract that restricts an employee from accepting a job from a competitor of the employer after their employment relationship ends. It may also bar an employee from starting a competing business.
Employers might view non-compete agreements as a way to protect the investments they make in training employees. An employer’s competitors cannot benefit from the knowledge and experience their employees have acquired. For employees, however, overbroad non-compete agreements can significantly interfere with their ability to find a job in their chosen career.
Does New Jersey Allow Non-Compete Agreements?
New Jersey allows non-compete agreements but limits their scope in several ways. Court decisions have established a three-part test for determining whether a non-compete agreement is enforceable:
1. Does the agreement protect a valid interest of the employer?
2. Does it place an undue hardship on the employee?
3. Is it harmful to the public interest?
The second part of the test often receives the most attention. A non-compete agreement must set reasonable geographic limits, and its duration must be reasonable, such as a restriction on working for direct competitors within seven miles for six months.
What Is the New FTC Rule?
Section 5 of the Federal Trade Commission Act of 1914 prohibits “unfair methods of competition.” It authorizes the FTC to make rules against practices it deems unfair. The new rule is based on the FTC’s determination that non-compete agreements violate the statute. The FTC has not published the rule in the Federal Register yet, so the rule currently does not have an effective date. Upon publication, the rule will take effect after 120 days unless a court intervenes.
Most non-compete agreements will become unenforceable if the rule becomes effective. Exceptions to the rule include the following:
– Non-compete agreements signed by senior executives before the rule’s effective date;
– Agreements that are part of a “bona fide sale of a business entity”;
– Agreements that are subject to an ongoing cause of action on the effective date; and
– Enforcement of an agreement when “a person has a good-faith basis to believe that [the rule] is inapplicable.”
The FTC notes that non-disclosure agreements and trade secret laws can provide many of the same benefits that employers seek through non-compete agreements. Rather than use non-compete agreements to “lock in workers,” the FTC suggests that employers could “compete on the merits…by improving wages and working conditions.”
If you believe your employer has violated your rights in New Jersey or New York, you need an experienced employment lawyer who can help you assert a legal claim for damages. Schedule a confidential consultation with the Resnick Law Group today through our website or by calling 973-781-1204 or 646-867-7997.