The New York State Legislature passed a bill restricting non-compete agreements between employers and employees. If signed into law by Governor Hochul, what does this mean for non-compete agreements, current and future?

WHAT DOES THE BILL SAY?

On June 20, 2023, the New York State Assembly passed Bill A01278. The bill bans contracts that restrain individuals from working in a "profession, trade, or business of any kind." Employers will be prohibited from seeking, requiring, or accepting a non-compete agreement from any "covered individual." "Covered individual" is a person who may or may not be employed under a contract of employment, but performs work for another person, is economically dependent on that person, and is under an obligation to do work for that person.

The bill allows employees to bring an action against employers related to a prohibited non-compete agreement. Employees can seek to void the prohibited agreement and obtain injunctive relief to prevent the enforcement of such agreement. Courts can reward plaintiffs up to $10,000 in liquidated damages, as well as recovery for lost compensation, damages, and attorney's fees. While plaintiffs have a two-year statute of limitations, this can begin on the later of (i) when a prohibited non-competition agreement was signed, (ii) when a covered individual learned about the prohibited agreement, (iii) when the employment relationship was terminated, or (iv) when the employer takes steps to enforce such a prohibited agreement.

WHAT EXCEPTIONS DOES THE BILL INCLUDE?

The ban does not apply to agreements that (i) are for a fixed term of service, (ii) prohibit disclosure of trade secrets or confidential information, or (iii) prohibit solicitation of clients. These agreements will likely still be enforceable as long as they are reasonable under New York law- not overbroad and not harmful to the employee or the public.

WHAT TYPES OF AGREEMENTS OR PROVISIONS ARE LEFT OUT?

While the bill includes explicit exceptions, it does not address how it will affect certain non-competes that New York typically recognizes. Sale-of-business non-competes are very common and enforced by courts in order to protect people who buy a business. However, the bill does not address whether these sale-of-business agreements are an exception. Additionally, the bill does not address employee non-solicitation agreements. Intended to stop terminated employees from taking other employees, these agreements are commonly recognized in New York, but it is not known whether the new ban will apply to them. The bill also does not address forfeiture clauses, in which an employee's benefits post-termination are conditioned on certain non-compete standards. While these clauses have been enforced in New York courts, the new bill is silent on whether or not these provisions will be impacted.

WHEN DOES THE BILL GO INTO EFFECT?

If and when signed into law by Governor Hochul, the law will take effect 30 days later.

DOES THE BILL APPLY RETROACTIVELY?

The law will not apply retroactively to already existing non-competition agreements. Instead, it only applies prospectively, banning non-compete agreements entered into or modified on or after the effective date.

WHAT IMPACT WILL THIS HAVE ON EMPLOYERS AND EMPLOYEES?

Employers should take a look at current non-compete agreements and consider amending them as they see fit before the law takes effect. Additionally, employers should look at employment contract or non-compete agreement templates and begin to consult with counsel about changing the language before the law takes effect to ensure that any new hires after the effective date are not unlawfully restricted. Employers should also begin to consider other ways to protect their business and interests that non-compete agreements previously served, such as confidentiality agreements.

CONCLUSION

New York is following in the footsteps of other states and the Federal Trade Commission's recent recommendations on banning non-compete agreements nationwide. The legislature commented that they support such a bill because of the negative impact that non-competes have on the economy, as they prevent employees from freely navigating the labor market. While this will likely have a positive effect on employees, employers will have to make significant adjustments in order to protect their businesses and interests.

Contributions to this blog by Juliette Adams.

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