What NJ Employees Need to Know About Severance Agreements
Most employees in New Jersey work in at-will status, which means they can be fired for any reason that does not violate state or federal law. However, a discharged employee might be asked to sign a severance agreement that includes certain restrictive covenants. Employers often include these covenants to protect their business interests. Employees should make sure they understand the full meaning of such agreements before signing.
Restrictive covenants in severance agreements can be of different types. A non-compete clause prohibits the employee from working for a competitor or starting a similar business within a defined geographical area and time frame. Non-solicitation clauses prevent employees from reaching out to former clients or colleagues to encourage them to leave the company. Confidentiality clauses prohibit the disclosure of trade secrets and sensitive business information.
In New Jersey, courts assess the enforceability of restrictive covenants using a reasonableness standard. The restrictions must (1) protect a legitimate business interest, (2) impose no undue hardship on the employee and (3) not be injurious to the public. Overly broad clauses are often deemed unenforceable. However, courts may modify overly restrictive clauses rather than void them entirely, a process known as “blue penciling.”
New Jersey courts tend to disfavor non-compete clauses that unduly limit an individual’s ability to earn a livelihood. While a non-compete clause lasting six months to a year may be enforceable in some industries, courts are less likely to uphold longer restrictions unless the employer demonstrates a compelling business need. Furthermore, if the restrictions go beyond what is necessary to protect confidential information or trade secrets, they are more likely to be struck down.
Non-solicitation clauses are generally more enforceable, as they do not prevent an employee from working but instead limit direct engagement with former clients or colleagues. Confidentiality clauses are also widely upheld, provided they do not unreasonably restrict an employee’s ability to use general skills and knowledge acquired during employment.
Some severance agreements include a liquidated damages clause. This establishes a predetermined amount an employee must pay if they breach a restrictive covenant or otherwise violate the agreement. Employees should be particularly cautious of such provisions, as they can lead to significant financial liability. In New Jersey, these clauses are enforceable only if they reflect a reasonable estimation of actual damages suffered by the employer due to the breach. If a liquidated damages amount appears to be a penalty rather than a fair estimation of damages, courts may deem it unenforceable.
Given the complexities of severance agreements and the potential long-term impact of restrictive covenants, employees should have a skilled New Jersey employment law attorney review the agreement before signing. An attorney can assess whether the terms are fair, negotiate modifications, and provide guidance on potential risks. Employees should never assume that an employer’s severance terms are non-negotiable. Many agreements can be adjusted through strategic legal advocacy.
Kevin T. Kutyla, Esq. in Succasunna and Newton is a dedicated advocate for employees’ rights in Sussex and Morris counties and throughout New Jersey. I help workers negotiate severance agreements and fight against unfair restrictive covenants, so that they can move forward in their careers with confidence and legal protection. Call 973-940-8970 or contact me online to schedule an appointment.