Proposed ban on New York worker non-competes awaits approval from Governor

Background

The bill adds a new section to the New York Labor Law that would prohibit employers from entering into non-compete agreements with any “covered individual.” This term is broadly defined to include employees and any other person who, whether or not employed under a contract of employment, performs work or services for another person on terms and conditions that result in their economic dependence on, and an obligation to perform duties for, that other person.

The passage of the bill follows the release of a proposed federal non-compete rule by the U.S. Federal Trade Commission (FTC) on January 5, 2023, which, if finalized, would prohibit employers from establishing, enforcing, or maintaining non-competes against workers in the U.S. See A&O’s recent publication on the FTC rule here.

When would the rule take effect?

The bill will be sent to the New York state Governor, Kathy Hochul, who will have 30 days upon receipt to sign or not sign the bill. If signed into law, the bill will take effect 30 days thereafter and will be applicable to contracts entered into or modified on or after such effective date.

What is a “non-compete agreement” under the bill?

The bill defines a non-compete agreement to mean any agreement, or clause within an agreement, between an employer and a covered individual that prohibits or restricts such covered individual from obtaining employment after the conclusion of employment with the employer. The bill specifies that any contract that restrains a covered individual from engaging in a lawful profession, trade, or business of any kind will be void.

Who will be impacted by the bill?

The bill will apply to any employer or its agent, and to the officer or agent of any corporation, partnership, limited liability company, or other entity seeking to enter into a non-compete agreement or non-compete clause within a contract (such as an employment agreement).

Are there any exceptions?

The bill permits employers to enter into the following types of restrictive covenant agreements, so long as they do not otherwise restrict competition in violation of the bill:

• Non-competes within fixed-term service agreements: Agreements with a prospective or current covered individual that establish a fixed term of service and impose non-competition restrictions.
• Non-disclosure agreements: Agreements that prohibit disclosure of trade secrets, and/or confidential and proprietary client information.
• Client non-solicitation agreements: Agreements that prohibit solicitation of clients of the employer who the covered individual learned of during employment.

The exempt agreements and their enforceability will remain subject to relevant provisions of federal, state, or local law, rule, or regulation and New York common law.

The bill is silent on non-solicitation of employees and service providers. The bill does not include an exception for non-competes in the context of a sale of business.

Private right of action

The bill creates a private right of action under which a covered individual may bring a civil suit in court against any employer or person alleged to have violated the non-compete prohibition within two years following the latest of the dates on which: (1) the prohibited non-compete agreement is signed; (2) the covered individual learns of the prohibited non-compete agreement; (3) the employment or contractual relationship terminates; or (4) the employer takes any step to enforce the non-compete agreement. The bill provides courts with jurisdiction to void any offending non-compete agreement and order all appropriate relief, including enjoining the conduct of any person or employer, ordering payment of liquidated damages (up to USD10,000), and ordering additional remedies permitted under the bill, such as payments for lost compensation, damages, and reasonable attorneys' fees and costs.

What are some outstanding questions?

• Scope of covered individuals:
  • Independent contractors: The bill’s expansive definition of “covered individuals” leaves open the question of whether independent contractors would be covered by the non-compete ban.
  • Non-New York employees: The bill is also silent on whether the non-compete prohibition would apply to an employee located outside of New York or an employee that transfers to New York with a non-compete from a state or country in which non-competes are permitted.
• Retroactive applicability:
  • Existing non-competes: The bill states that it would be applicable to non-competes “entered into or modified on or after the effective date”; therefore, it appears that the bill would not retroactively void, and employers would not need to rescind, existing non-competes. However, the bill also states that “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void,” leaving some room for debate.
  • Severance tied to non-competes: It is unclear whether existing severance or other arrangements contingent on, or negotiated in exchange for, a non-compete would be affected by the bill and whether amending the terms of existing non-competes or severance agreements would invalidate the non-competes.
• Employer alternatives:
  • The bill does not address compensation or other consideration provided by employers in exchange for non-compete protections. In reaction to the ban on non-competes, employers may seek to negotiate related terms differently, such as entering into fixed-term agreements, providing workers with longer notice periods or using garden leave as an alternative to non-competes. Under the bill, however, it is unclear whether employers would be permitted to offer economic incentives (such as severance payments or extended garden leave) in exchange for non-competes or whether employers can demand forfeiture of compensation if an employee violates a non-compete under the bill.

It is possible that Governor Hochul will revise certain aspects of the bill before it takes effect (which would be subject to approval by the legislature), but in any case, the bill may be subject to interpretation by the courts.

What should employers be doing now?

1. Review any standard non-compete agreements or clauses governed by New York state law or used for service providers in New York and begin considering possible alternatives, should the bill take effect.

2. When entering into new agreements with future employees and service providers, consider using permitted exceptions, such as entering into renewable fixed-term service contracts that impose non-competition restrictions.

3. Keep an eye out for further updates on the bill (including possible legal challenges) and seek legal counsel and interpretive guidance about its possible impact.