Republican Head, Democratic Heart, and Bad Law

My spouse aptly characterizes me as having a Republican head and Democratic heart; she means that I think analytically but can let my compassion for those less fortunate than us govern my decision-making (consider me a centrist).  But a recent measure introduced in the NJ State Assembly causes no such conflict within me.  While I don’t usually write about politics, this bill regardless of its good intentions is bad law.

In short, the bill seeks to limit employer rights with with ex-employees by vitiating the enforcement of non-competition, non-solicitation and confidentiality agreements between companies and former employees who qualify for unemployment benefits.  If enacted, this legislation would be bad for both businesses and employees.

The rationale of the bill’s sponsors is that voiding these agreements would allow middle- and upper-level employees, freed of these constraints, to find work in their industries more readily, thereby reducing unemployment in the State.  In turn, this would reduce the cost of unemployment taxes to employers.  The sponsors cite stories of constituents that suggest they are being blocked from gaining new jobs because of these covenants.

My “Democratic heart” is all in favor of putting people back to work, but this bill, in my view, would almost certain fail to accomplish that.  My “Republican head” concludes that the consequences of this legislation would damage businesses significantly, limit ex-employees’ unemployment benefits, potentially cause greater unemployment, and yet could still reduce the unemployment tax rate to employers.

This issue affects businesses in more industries than just technology and life sciences/biotech where the importance of intellectual property and trade secrets are apparent, and it has broader effect than with just large companies or senior executives.  Consider the case of Thomas’ English Muffins, where one of seven key employees who knew the Company’s proprietary method of making those famous “nooks and crannies” is alleged to have taken that trade secret to a job with a new employer.  Or this – earlier in my career, I accepted employment as the #2 at a profitable, growing, mid-size NJ manufacturer.  When I arrived to start my job just 3 weeks later, the Company was 1/3 smaller and operating at a loss because an employee left, and armed with knowledge about the Company’s customers, product designs and pricing, took its largest customer to a competitor.

The damage to a business from this proposed legislation would dwarf any savings in unemployment taxes and could even undermine a company’s future profitability or existence.  That would put a lot more employees (at all levels) on unemployment, many more than would find employment because they no longer had to observe their obligations to former employers.  Unemployment in the State might actually increase!

Moreover, because the legislation is applicable specifically to individuals receiving unemployment benefits, you can bet that employers would be highly motivated to oppose ex-employees’ applications to qualify for such benefits. Ex-employees could find themselves terminated without even the modest safety net that unemployment provides. And if successful in prevailing over ex-employees in contested unemployment proceedings, the unemployment tax rate levied on a company might actually decrease.

The final argument of the bill’s sponsors is that ex-employees don’t have the means to fight unreasonable covenants in the courts.  I have two reactions.  First, the time for to negotiate (or decide on the acceptability of) employment conditions is before accepting employment with a company, not after leaving the company.  Prospective employees have a lot more leverage when being wooed by an employer to make such covenants reasonable.   Second, if any legislation is to be considered, perhaps an act that provides greater clarity on what is reasonable with respect to such covenants would be a better solution.  While it would be challenging to define what’s reasonable across all businesses and conditions, this approach would reduce future litigation and remove the issue as a “reason” for unemployment remaining stubbornly high.

Leaders, and especially political leaders, should look for rational solutions that consider society’s needs, not seek additional ways to make New Jersey an unattractive location for business.  That’s just wrong-headed for businesses and heartless for employees.

As a corporate leader, what would you do if this bill is enacted into law?

About Ken Drossman

Ken Drossman is a Managing Director at Oak & Apple Partners, LLC. Ken has spent more than 35 years demonstrating practical financial acumen by leading, advising and guiding privately-owned, small and middle-market companies through financial and operating challenges. He has in-depth experience in all phases of financial, strategic and operating management from hands on cash flow budgeting through acquisition financing, from divestiture of business units to reorganizing and leading newly formed companies. Prior to co-founding Oak & Apple Partners, Ken has been the principal at Lakeview Business Consulting, LLC, which assists entrepreneurial business owners and their companies in achieving their business vision. Ken earned both his undergraduate and graduate degrees from The Wharton School of the University of Pennsylvania. Before founding Lakeview Business Consulting in 2006, he served for 18 years as CEO, COO and/or CFO at several privately-owned companies, in industries including financial services for hospitals; digital document storage and outsourced back-office services for professional service firms; design and distribution of personal business accessories through big-box retailers; capital goods manufacturing for national and regional retail chains; and information services for beverage alcohol manufacturing and marketing companies. Previously, Ken was a Partner at Grant Thornton, LLP, where he provided management consulting services to such companies as AT&T, Baxter Laboratories and GTE-Sylvania, as well as many middle-market companies.
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4 Responses to Republican Head, Democratic Heart, and Bad Law

  1. Great post, Ken. I agree that this bill is bizzare and misguided, but as for the contention that eliminating noncompete clauses which keep ex-employees out of the same industry would damage NJ’s employment base — see California — where the statutory prohibition against such noncompete clauses does not seem to have undermined the ability of Silicon Valley to innovate.

    I can’t imagine this bill will make it into NJ law, or that if it does, it would survive a near-certain veto by our governor.

    Best,
    Adam

  2. Glenn Tippy says:

    Ken,
    What’s the designation of this bill? It has so much negative potential that I’d be interested in reading what’s been posted. And in having my industry’s lobbyist reveiw it.

    Generically, non-competes are already easily overturned if they prevent an ex-employee from making a living. And intellectual property is very often the only valuable property for small businesses.
    Thanks for the heads up.

  3. Pingback: New Jersey A3970 – Eliminating Non-Competition Agreements | GBW Insurance's Blog

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