On June 7, 2023, the New York Senate passed a bill that would ban on non-compete agreements with individuals in New York. Later in June, 2023, the New York State Assembly passed a companion bill and sent it to Governor Hochul’s desk, where it awaits her signature and must be signed by the end of the year to become law.
As of now, Governor Hochul has not commented on the bill. However, in the past, the Governor has indicated support for banning non-compete agreements for lower-wage workers in certain industries. The New York Legislature’s bill comes on the heels of the Federal Trade Commission’s proposal to crack down on the use of non-compete agreements, as well as similar action by other states to reduce or eliminate the use of non-competes at all levels of employment.
What Does the New Law Mean?
As currently drafted, this bill appears to create a blanket ban on using non-compete agreements across all levels of New York employment—from bankers to brick-layers. Accordingly, its terms may create confusion and quickly lead to litigation.
By contrast, some other states have recently enacted laws that prohibit the use of non-compete clauses or agreements for lower-wage workers or require appropriate notices for non-competes to be effective. In this case, New York’s bill would prohibit all prospective non-compete agreements and create a private right of action for any individual harmed by their non-compete.
Under the bill, a prohibited non-compete agreement is “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 employment with the employer included as a party to the agreement.”
A “covered individual” is “any other person who, whether or not employed under a contract of employment, performs work or services for another person on such terms and conditions that they are, in relation to that other person, in a position of economic dependence on, and under an obligation to perform duties for, that other person.”
Given the bill’s broad reach, this expansive definition of “covered individual” might even stretch to cover certain independent contractor relationships or larger client relationships. The interpretation of “economic dependence” could have a host of unintended consequences for New York businesses and contracts.
Important Things to Know About New York’s Proposed Ban on Non-competes
The Law Only Applies to New and Modified Contracts
While the New York Senate had originally considered a bill with a retroactive effect, the Assembly bill that now sits on Governor Hochul’s desk is forward-looking. Therefore, the proposed legislation will not affect any non-compete agreements entered into before the effective date of the new law.
Because the bill has a 30-day delay from the time the Governor signs it into law until the time it takes effect, companies will have a window in which to review existing agreements and confirm they are satisfied with the protection they provide. Because the legislation will apply to non-competes that are modified after the law is in place, companies should think carefully about how they handle protecting themselves from competition in the future.
The New Law Is Broad and Deep, and There Are Few Ways Around It
It is not a total misnomer to call this a “complete ban” on non-compete agreements. The law is designed to be near-complete as there are very limited exceptions to its applicability. Where exceptions are available, they seem designed to prevent independent contractors and large customers from being swept into its reach. For example, non-compete clauses are permissible in fixed-term agreements, often used with contractors or suppliers.
Non-compete clauses can also legally be used to prohibit the disclosure of confidential and proprietary client information and to protect a company’s trade secrets. Customer non-solicitation agreements are also permitted under the bill. Still, they must be narrowly tailored to include language specifying that:
- The employee’s relationship with said customers was developed during their employment, and
- The customer non-solicitation clause does not function only as a means of restricting competition.
Any customer non-solicitation clause will still be subject to interpretation by the New York courts, including standard tests of whether the restrictions imposed by said clauses are appropriately tailored and reasonable. Therefore companies should keep in mind that courts can narrow the scope of any non-solicitation agreement they negotiate with employees, even if such agreements are technically allowed under the new law.
The Sale of a Business Does Not Create an Exemption
Unlike proposed and enacted non-compete bans in some other states and under federal law, New York’s new bill includes no express carve-out for non-competes entered into in connection with the sale of a business. This makes New York’s law unique among proposed non-compete bans.
For instance, Minnesota’s recently enacted statute included a sweeping ban on restrictive covenants but a well-defined carve-out for the sale of a business. Even the FTC’s broad proposed rulemaking that would ban non-competes nationwide contains a clear carve-out permitting non-competes in connection with the sale of a business. While New York courts may theoretically rely on common law to imply a similar sale-of-business carve-out to the New York ban if enacted, this significant uncertainty for a standard, material deal term in corporate acquisitions could have a major impact on the New York mergers and acquisitions environment.
Covered Employees Are Granted a Private Right of Action
In addition to voiding virtually every kind of non-compete clause in almost every industry, the bill provides certain employees with a private right of action. Civil actions under this proposed law must be filed against the employer within two years of any of the following:
- Signing the prohibited agreement,
- Learning of the prohibited clause or agreement,
- Terminating the employment relationship or contract, or
- Enforcing the non-compete clause in any way.
Damages for violating the new ban on non-competes can include injunctive relief, as well as compensatory and liquidated damages and attorney fees and costs. This can become quite costly for employers very quickly, especially where large numbers of lower-level workers are bound by agreements that even an employer may not be aware of.
Got Questions? Don’t Look to the Text of the Statute
The ban is extremely broad, but it fails to answer important questions for employers as they prepare for Governor Hochul’s signature and this bill’s implementation. For example, the bill is completely silent on the issue of employee non-solicitation agreements. These clauses typically prevent departing employees from encouraging others to join them at their new place of employment. Could this also be a form of non-compete? The law is not clear.
The bill also fails to address “garden leave” agreements. These agreements permit employers to pay employees—typically senior executives—a full or partial salary to refrain from competing for a set amount of time. These agreements are similar in structure to what one might see in the competition restrictions in the sale of a business. The bill is again silent on matters of fair compensation for non-competition.
Similarly, the bill is devoid of language addressing situations where a departing employee may choose to forfeit equity or deferred compensation for the right to set up a competing business or immediately go to work for a competitor. These oversights seem strange, as all these situations are common in both the financial and technology sectors—both of which make up a significant proportion of New York’s business community. In fact, in a world where over 40% of New Yorkers are subject to non-compete agreements, this oversight could have dire consequences for the viability of a broad ban on non-compete agreements in New York.
What’s Next for New York Employers?
If the bill is signed into law, its broad ban and baffling silence on important issues make it likely that implementation will be delayed for years by litigation. While the courts may be stuck with the unfortunate task of fleshing out large sections of this law, employers should nonetheless prepare for some form of restriction on non-competes coming soon.
If this bill becomes law, on the more extreme end, employers in New York might seriously consider relocating employees in sensitive positions to states in the tristate area that have not taken this extreme approach to non-competes. In the meantime, employers who use non-compete agreements should speak with employment counsel and with M&A counsel to ensure that any agreements are as compliant as possible given the uncertainties presented by this bill. And employers with nationwide businesses may want to do a broad non-compete compliance check given the FTC-proposed rulemaking and patchwork of state non-compete bans outside New York.