Q:  An employer terminates an employee after deciding the employee’s position must be eliminated to save on costs. The employee previously signed a non-competition agreement.  Assuming the agreement is otherwise enforceable, can the employer enforce it against the employee even though that employee was terminated without cause and is collecting unemployment?

A:  The majority of NY Courts have not allowed employers to enforce non-competition agreements and similar restrictive covenants against an employee who has been laid off or terminated through a reduction in workforce.  By contrast, NJ Courts will often enforce restrictive covenants under such circumstances.  NJ law, however, may soon change. New Jersey state legislators recently proposed A3970, a bill designed to prevent New Jersey employers from enforcing agreements restricting employees from competing, disclosing confidential information or soliciting employees or customers if the employees are found eligible to receive unemployment compensation benefits. The proposed law would not apply to any agreement in effect before the law is enacted.  If this bill passes and becomes law, an employer’s ability to protect itself through restrictive covenants will be severely limited.  Employees who plan to voluntarily leave their jobs for greener pastures will have the incentive to, instead, stop performing or perform poorly in order to force termination because they will be free to solicit old customers and be that much more attractive to new employers.  We can also expect the number of contested unemployment claims to rise dramatically – not because employers wish to stop employees from receiving such benefits but because if they do, the employers will not be able to prevent former employees from competing and soliciting their customers and employees.  Employers hoping to avoid the ramifications of A3970 may wish to put non-competition and non-solicitation agreements in place before enactment of the statute.

UPDATE - A3970 died in committee.  

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