New York State appears set to join the growing number of jurisdictions prohibiting or significantly limiting the use of employment non-compete agreements. The Empire State’s non-compete ban (Bill No. S3100A), which was recently passed by both chambers of the New York State legislature — and which appears to be headed toward Governor Hochul’s signature — represents yet another in a series of recent movements toward restricting non-compete agreements.
For example, as we reported in January, the Federal Trade Commission announced a proposed regulation that, if adopted, would abolish non-competes across the U.S. Likewise, a number of states have implemented barriers to non-compete agreements, including, for example, imposing minimum income thresholds for enforceability of such agreements.
This article explores the New York bill’s key provisions and implications.
Key Provisions — Full Ban on Non-Competes, with Significant Penalties
- Non-Compete Prohibition: The bill prohibits non-compete agreements for service providers. The bill defines a “non-compete agreement” to mean “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 the employer included as a party to the agreement.” The bill is drafted to be inclusive of “any . . . person who . . . performs work or services for another person,” meaning that it is likely to apply to employees as well as independent contractors.
Unlike some other states, the New York bill does not include an income threshold, meaning that the non-compete prohibition will apply to all covered workers, even those who are high earners.
- Cause of Action/Relief, including Liquidated Damages: Non-compliance with the non-compete prohibition will come at significant risk. Covered individuals may bring a cause of action against any employer or person who allegedly violates these provisions.
And that’s not all; the bill further provides that a court shall void any such agreement and allows for liquidated damages (capped at $10,000), back pay, damages, and attorneys’ fees.
Confidentiality and Non-Solicitation Provisions are Still Permitted (But be Careful)
The bill specifically states that it shall not apply to confidentiality or client non-solicitation provisions. However, it limits the non-solicitation carveout to non-solicitation provisions that apply to “clients of the employer that the covered individual learned about during employment.” In other words, the bill restricts the breadth of client non-solicitation provisions. Businesses cannot simply prohibit solicitation of all of the company’s clients. Instead, there must be some connection between the client and the worker subject to the prohibition.
The bill does not directly address employee non-solicitation provisions. As the definition of “non-compete agreement” is limited to prohibitions or restrictions on obtaining employment, the bill, however, is not likely to change an employer’s ability to enter into employee non-solicitations.
Regardless, though, employers should be cognizant of any language couched within an employee or client non-solicitation provision that may be viewed as a prohibition or restriction on obtaining employment or that would otherwise be viewed as a restraint on “engaging in a lawful profession, trade or business” (as that clause would likely violate the bill).
Missing Exemption — Sale of a Business
Employers familiar with non-compete prohibitions in other states may be aware of exceptions in the context of the sale of a business. However, it remains unclear whether the New York bill would prohibit non-compete agreements in the context of selling a business, when the purchaser will be employing an individual seller following closing.
Unlike recent changes to non-compete laws in other jurisdictions, there is no specific carve out for mergers and acquisitions, business dissolution, or the like, and the non-compete agreement definition is broadly inclusive of “any agreement, or clause contained in any agreement, between an employer and a covered individual[.]”
The Prohibition Will Not be Retroactive
The bill will not void current non-compete agreements (or non-compete agreements signed before the effective date). The prohibition language is forward-looking and will only apply to agreements entered into on or after the date the bill becomes effective.
Bill No. S3100A represents a substantial shift from New York’s current non-compete law. As the bill is set to become effective 30 days after its (expected) signature by Governor Hochul, employers should immediately evaluate their current agreements in preparation for this ban.
