Will New York State Ban Employee Non-Competes?

On June 7, the New York Senate passed 3100-A, prohibiting non-compete agreements. The vote was 40-21 in favor of the bill. Then, on June 20, the New York State Assembly passed the bill with a vote of 95-52. The next step is sending the bill to Governor Hochul, who will have 30 days to sign it if the Legislature adjourns. If she fails to sign it, the bill will not become law.

Currently, Governor Hochul has yet to make any comments about whether she supports the bill or not. However, in the past, she has expressed support for banning non-compete agreements, but only for lower-wage workers. In 2022, she announced her intention to propose legislation eliminating non-compete agreements for workers earning below the median wage in New York State.

The bill will be added to the New York Labor Law as Section 191-d if signed into law. However, like many bills towards the end of a legislative session, this one is drafted in a way that may lead to confusion and potential legal disputes over its interpretation. For example, the bill defines a non-compete agreement as any agreement that prohibits or restricts a covered individual from obtaining employment after leaving the employer. This could include garden leave or notice provisions commonly used in the financial services industry, where employees remain employed but stop performing their duties.

The bill defines a “covered individual” as an employee or anyone who performs work or services for another person under conditions of economic dependence and an obligation to perform duties. This could include independent contractors or individuals with significant client relationships, depending on how “economic dependence” is interpreted.

One notable omission in the bill is a specific exemption for non-compete agreements in the context of selling a business. Non-compete provisions are typically seen as necessary in such transactions to protect the goodwill of the purchased company. It is common for the seller to continue providing services after the sale, which could be affected by this new ban on non-competes. This omission could make New York an outlier compared to jurisdictions like California.

Although California law prohibits post-employment non-compete agreements, California law allows parties to enter non-compete agreements in the context of a business sale by certain detailed statutory requirements. Because of the size of the California economy, and the willingness of California courts to enforce appropriate sale-of-business non-compete agreements, buyers of businesses both inside and outside of California frequently seek to maximize compliance with California law.

The New York bill will not apply to existing non-compete agreements. It specifies that it will take effect 30 days after becoming a law and will only apply to contracts entered or modified after that effective date. However, employees may argue otherwise based on other parts of the bill that declare any contract restraining a person from engaging in a lawful profession, trade, or business as void. The bill’s sponsor has also suggested that it would invalidate existing non-compete agreements. This ambiguity could lead to significant litigation in the future.

The consequences for employers guessing wrong about the reach of the statute could be severe. The law provides covered individuals with a two-year statute of limitations for claims, starting from the later of several events related to the non-compete agreement. Courts are also granted enforcement powers, including the ability to void non-competes and award various relief and damages, including up to $10,000 in liquidated damages per covered individual.

A slight relief is that the law explicitly states that it does not affect a company’s ability to enter into agreements that prohibit the disclosure of trade secrets, confidential client information, or solicitation of clients. However, there is still some ambiguity about how the exception of “does not otherwise restrict competition” would apply. Additionally, relying solely on confidentiality agreements may offer limited protection against former employees using trade secrets at their new employer, as detecting and proving such misuse can be challenging.

If Governor Hochul signs the bill, it will be a substantial change for New York employers. New York will join several other states that have banned post-employment non-compete agreements, including California, Minnesota, North Dakota, and Oklahoma. In recent years, other jurisdictions such as Colorado, Illinois, Maine, Maryland, Nevada, New Hampshire, Oregon, Rhode Island, Virginia, Washington, and Washington, D.C. have also limited the validity of non-compete provisions based on specific factors like compensation and employee classification.

There has also been increased scrutiny on non-competes at the federal level with the Federal Trade Commission’s proposed new rule seeking to ban non-compete clauses (see our article from January 2023) and the National Labor Relations Board General Counsel’s memorandum expressing the view that certain non-compete provisions in employment and severance agreements could violate the National Labor Relations Act.

If you need help or have questions, please drop us a line at +1 212 545 8022 or visit our website – www.rooney.law.

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