On June 20, 2023, the New York Assembly approved legislation that would ban noncompetition agreements in employment contracts. The bill, A1278B/S3100A, is expected to be signed by Governor Kathy Hochul, which will make New York the fifth state in the U.S. to ban noncompetition covenants in agreements between employers and employees. Similar statutes already exist in California, Oklahoma, North Dakota and Minnesota.
When Does the Law Take Effect?
The law will take effect 30 days after Governor Hochul signs the bill, and it will apply only to contracts entered into or modified on or after its effective date.
Who Is Covered by the Bill?
The bill applies to all employers and "covered individuals," defined to include any individual who, in a position of economic dependence and with an obligation to perform duties, performs work or services for another person. This broad definition would include independent contractors.
Which Types of Agreements Are Covered?
The bill applies to any "non-compete agreement," defined as any agreement, or clause contained in any agreement, between an employer and a covered individual that prohibits or restricts the covered individual, after the conclusion of employment, "from obtaining employment." The bill further provides that "no employer or its agent, or the officer or agent of any corporation, partnership, limited liability company, or other entity shall seek, require, demand or accept a non-compete agreement from any covered individual."
Are There Any Exceptions to the Bill?
The bill contains several exceptions for certain types of obligations:
- The restrictions do not apply to "fixed term contracts." Since the definition of noncompete agreements only applies to restrictions "after the conclusion of employment with the employer," a "garden leave" or notice provision that requires the employee to remain employed for a specified term appears to be lawful so long as the employee is still technically employed by the employer and being compensated, even if relieved of responsibilities.
- The bill does not affect agreements that prohibit disclosure of trade secrets or confidential and proprietary client information.
- The bill does not affect agreements that prohibit an employee from soliciting clients of the employer that the covered individual learned about while working for the employer. This comports with New York court holdings that an employer does not have a legitimate interest in preventing a former employee from providing services to clients developed through an employee's own independent recruitment efforts prior to working at the employer.
- The bill is silent on?and so does not appear to restrict?the use of noncompetition provisions in an agreement for the sale of a business.
- Likewise, the bill does not contain any restrictions on provisions that address a former employee's poaching of other employees or contractors.
Can the Bill Be Circumvented by Applying Another State's Law Under Contract?
Can employers avoid application of the bill by contracting for the law of a different state to apply and/or by mandating that disputes be adjudicated in another state?
The bill is silent on this question, but the right to bring a civil action for a violation of the bill, as discussed below, makes any attempt to avoid the bill's application risky.
What Are the Consequences If an Employer Violates the Bill?
The bill states, "Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." In addition, the bill provides that a covered individual may bring a civil action against any employer or persons alleged to have violated the bill. The bill further provides that a court may order "all appropriate relief," including injunctive relief, payment of liquidated damages of not more than $10,000, and "lost compensation, damages, reasonable attorneys' fees and costs."
What Is the Time Frame for Asserting Rights Under the Bill?
Employees can file a civil action within two years from the later of when: (i) the agreement is signed, (ii) the covered individual learns of the noncompete, (iii) the employment is ended, or (iv) the employer seeks to enforce it.
What This Means for Employers
If Governor Hochul signs the bill into law as expected, companies with New York-based employees or independent contractors should engage counsel to reevaluate their current and prospective restrictive covenant agreements and exit procedures.
What Questions Remain Open?
Several questions remain open, and time will tell how the bill will be applied to them.
One significant issue is whether monetary incentives, such as equity awards or pension payments, could be conditioned on an employee's agreement to abide by restrictions. Based on the bill's language that an employer cannot "seek, require, demand or accept" a noncompete agreement from a covered individual, the answer would appear to be no?yet the consequences of such an interpretation could be very harmful to employees.
A second question is whether, despite the bill's seeming exclusion of "garden leave" provisions, a court might consider them to be an "end run" around the purposes of the statute.
A third question is whether an amendment to an existing agreement, where the amendment does not impact the noncompetition covenant in the agreement, would constitute a "modification" bringing the noncompetition covenant within the purview of the bill.
For More Information
If you have any questions about this Alert, please contact Lawrence H. Pockers, Shannon Hampton Sutherland, Eve I. Klein, Michael D. Crosson, any of the attorneys in our Non-Compete and Trade Secrets Group, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.