Alert
06.22.23
If the bill is enacted, New York would become the fifth state to generally prohibit employee non-compete agreements, following California, North Dakota, Oklahoma and Minnesota (which passed a similar bill, S.F. 3035, just a few weeks ago). Eleven states and the District of Columbia currently restrict employers’ ability to require non-exempt employees and/or employees earning below a certain statutory minimum salary from signing non-compete agreements without fully banning such agreements.
This potential change in New York state policy coincides with a federal movement in the same direction: in January, the Federal Trade Commission (FTC) published a proposed rule for a nationwide ban on non-compete agreements and the National Labor Relations Board General Counsel recently issued a memo stating that non-compete agreements violate federal labor law “except in limited circumstances.”
Proposed Amendment to New York Labor Law
The bill would enact New York Labor Law Section 191-d, which would prohibit employers, corporations, partnerships, limited liability companies and any other entities from seeking, demanding or accepting a “non-compete agreement” from a “covered individual.”
A “covered individual” is defined as anyone who, “whether or not employed under a contract of employment, performs work or services for another person” that puts them “in a position of economic dependence on, and under an obligation to perform duties for, that other person.” This definition does not expressly state whether an independent contractor could be considered a “covered individual.” While such economic dependency is typically attributed only to employees under state and federal law, New York courts (as well as others) generally disfavor enforcing non-compete agreements against independent contractors in any event.
A “non-compete agreement” is defined as “any agreement, or clause contained in any agreement, between an employer and a covered individual that prohibits or restricts such covered individual from obtaining employment, after the conclusion of the employment with the employer included as a party to the agreement.”
The bill also voids “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind,” which mirrors language in California’s non-compete ban (CA Bus. & Prof. Code § 16600). The bill is not retroactive, applying only to agreements entered into or modified on or after the bill’s effective date.
The bill would create a private right of action for covered individuals to sue employers or other persons who they allege have violated the prohibition within two years from the latest of the following:
A civil action could result in: nullification of the non-compete agreement, injunctive relief, liquidated and non-liquidated damages, compensatory damages (including for lost compensation) and reasonable attorneys’ fees and costs. Although liquidated damages are capped at $10,000, the bill makes them mandatory, stating that the court “shall award liquidated damages to every covered individual affected under this section, in addition to any other remedies permitted.”
The bill does not contain exceptions for the sale of a business or partners leaving a partnership, making this proposed prohibition even more restrictive than California law and the FTC’s proposed rule. Employers would not have the option to provide garden leave or other considerations in exchange for a post-employment non-compete period, as is available under Massachusetts law.
The bill creates exceptions for (1) fixed-term contracts, (2) non-disclosure agreements, and (3) client non-solicitation agreements with respect to clients of the employer that the covered individual learned about during employment—provided that such agreements do “not otherwise restrict competition.” The bill is silent on employee non-solicitation agreements and states that it does not affect “any other provision of federal, state, or local law, rule, or regulation” related to the above three exceptions, which suggests that the existing common-law reasonableness test would still apply to the exempted types of agreements.
Next Steps for New York Employers
While it is not guaranteed that Governor Hochul will sign the bill, New York employers are well advised to begin planning for this potential non-compete ban to go into effect in the coming months. Especially with remote employees working across the country, employers will want to work with their employment counsel to reevaluate any restrictive covenant agreements they plan to ask current or prospective employees to sign and ensure they comply with all potentially applicable state laws.