Ask the Attorney: Can I Ask a Prospective Employee to Sign a Confidentiality Agreement Before I Hire Them?

Dear Ask the Attorney:

I am starting an online business which I know does not exist anywhere at this time.  This idea is one I researched for over a year and I know it has the potential to make a tremendous amount of money.  Now I need to hire people to help me realize this business.  Can I make them sign a confidentiality agreement/non-compete agreement even before we actually start working together?

CR

Our guest blogger is  Timothy J. Ford, Esq.  an associate with the firm of Einhorn Harris Ascher Barbarito & Frost, P.C.   Tim practices in the closely held business group concentrating on  employment law, general and commercial litigation, construction law and working with owners/managers of assisted living facilities. 

Dear CR:

What you are talking about is a part of a group of documents which are known as “restrictive covenants.”  These come in several forms such as confidentiality agreements, covenants not to compete (non-competition agreements), and non-solicitation agreements.  Generally, these agreements are enforceable in New Jersey.  However, the enforceability of these agreements varies depending upon the conduct that the employer wants to restrict and the manner in which they intend to restrict the conduct.

What are you, as the employer, trying to protect?  This may be customers, trade secrets, confidential business information or certain client relationships.  Generally, client relationships and current customers are subject to protection.  However, covenants that attempt to simply stifle competition will not be enforceable.  Trade secrets and proprietary business information such as customer lists, pricing information and trade secrets are protectable in New Jersey. 

When can you have an employee sign a restrictive covenant?  The answer to this question is not necessarily straightforward.  You may condition the hiring of an employee upon the execution of a restrictive covenant.  Similarly, the conditioning of continued employment is permissible in New Jersey.  This means that you can require that an employee sign a restrictive covenant in order to preserve employment with the company.  Refusal to hire or continue to employ an employee based upon his or her refusal to execute a restrictive covenant is allowed in New Jersey.

When is a restrictive covenant enforceable?  Non-competition agreements are enforceable provided that the terms are reasonable.  New Jersey Courts will enforce a restrictive covenant so long as it is necessary to protect the legitimate interests of the employer, imposes no undue hardship on the employee and does not injure the public.

What constitute “Legitimate Interests” of the Employer?  Your legitimate interests include protection of trade secrets, confidential information and proprietary customer information.  Courts often view covenants that attempt to restrict an employee from working in his or her trade to be unenforceable.  For example, if you need a website built for your idea to work, you cannot keep a person from building websites in general. Restrictions should be specific to be enforceable.

In addition to the factors set forth above, New Jersey Courts examine the overall reasonableness of a restrictive covenant.  The narrower the restricted conduct the more likely it will be enforced.  Generally, it the restriction is limited in scope, duration and geographic location, it will be enforced.  Although it is a factually sensitive analysis, one to two years is frequently accepted as reasonable.  Geographic limitations depend on the circumstances and the areas in which the employee performed his or her job. 

Whether you are looking to have an employee execute a restrictive covenant or looking to enforce one, it is important to make sure that the restriction is reasonable.  Although New Jersey is a blue pencil state, meaning that the Court may revise the terms of the covenant in order to make it more reasonable, the conduct you want to restrict may be revised by the Court, rendering the restrictive covenant hollow. 

The best practice is to have the restrictive covenant prepared or at least reviewed by an attorney with experience in this area before having a potential or current employee sign the agreement.

Generally speaking, you can have a prospective employee sign a confidentiality and non-competition agreement.  Since non-competition agreements are a restraint on employment, the standard is higher to enforce non-competition agreements as opposed to confidentiality agreements.  Provided they are reasonable taking into consideration the factors above, they will likely be enforced in New Jersey. 

Timothy J. Ford, Esq.

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