Key Takeaways:
- The Bill, if signed by Governor Kathy Hochul, will ban the use of new employee non-compete agreements regardless of an employee's job functions or pay thresholds.
- The Bill allows employees to bring a civil action against an employer or person alleged to have violated the Bill, and mandates liquidated damages at a maximum of $10,000.
- The Bill will become effective (30) days after Governor Hochul signs it.
On June 20, 2023, the New York State Assembly passed bill A01278
(the "Bill"), which, if it goes into effect, will ban the
use of new employee non-compete agreements in New York. The New
York State Senate already passed the counterpart bill, S3100A,
earlier this month. Significantly, the Bill does not carve out
employee non-competes entered into in connection with a sale of a
business, which even California permits. The bill also does not
have an exception for, and therefore prohibits, non-competes for
highly compensated employees, even those that provide salary
continuation. Certain practitioners and interest groups have
indicated opposition and reached out to Governor Kathy Hochul,
urging her to veto the legislation unless it is amended to address
these issues.
The Bill amends N.Y. Labor Law to prohibit employers or their
agents from requiring or accepting a non-compete agreement from a
"covered individual." The Bill casts a wide net for who
is a worker, by defining "covered individual" to include
any person who performs work or services for another person, such
that they are in a position of economic dependence on, and under
the obligation to perform duties for, that other person. However,
this definition does not expressly include independent contractors.
Further, the Bill generally voids contracts that restrain persons
from engaging in a lawful profession, trade or business. Notably,
the Bill voids non-compete agreements entered into or modified on
or after the effective date, and it does not apply retroactively.
So, existing employee non-compete agreements that remain unmodified
could continue to be enforced until those agreements expire.
The Bill provides covered individuals with a private right of
action against employers to void non-compete agreements and seek
damages from employers that attempt to impose prohibited
agreements. Covered individuals may bring an action within two
years of the later of: (i) the non-compete being signed; (ii) the
covered individual learning of the non-compete; (iii) termination
of the employment relationship; and (iv) the employer taking steps
to enforce the non-compete. Employers may be liable for liquidated
damages (a maximum of $10,000), lost compensation, damages, and
attorney's fees.
New York's effort to restrict the use of employee non-compete
agreements reflects a corresponding nationwide trend. States such
as California, North Dakota, Oklahoma, and Minnesota (which passed
a similar bill, S.F. 3035, in May 2023), have generally prohibited
the use of employee non-compete agreements. Additionally, the
General Counsel for the National Labor Relations Board, Jennifer
Abruzzo, recently issued a memo advocating that, except in limited
circumstances, employee non-compete agreements violate the National
Labor Relations Act. Further, the Federal Government has also
proposed similar action – the U.S. Federal Trade Commission
published a proposed rule at the start of 2023 that would impose a
near-complete ban of the use of employee non-compete
agreements.
If Governor Hochul signs the Bill, it will become effective (30)
days thereafter, and New York will become the fifth state to
generally prohibit the use of employee non-compete agreements.
Governor Hochul has expressed support for a restriction on
non-competes imposed on workers making below the median wage in New
York.
The proposed new law could make important changes in New York
non-compete law and potentially impact New York employment
agreements with employees in other states. Therefore, if signed,
New York employers may consider garden leave provisions,
non-solicitation clauses, and enhanced protections for confidential
information and trade secrets, to find other ways to protect their
legitimate competitive interests.
We will continue to monitor the status of the Bill and will provide
a following update.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
