As we previously detailed here, here, and here, over the past few years – but particularly in 2023 – non-compete agreements have come under intense scrutiny from US lawmakers and government regulators. That trend continued Tuesday, with New York State now on the brink of joining California, Oklahoma, and North Dakota as the fourth state to outright ban the use of workplace non-compete agreements.
Specifically, the New York State Assembly on Tuesday approved a bill that would bar an Empire State employer from seeking, requiring, demanding, or accepting a “non-compete agreement” from a “covered individual.” (The State Senate passed the bill earlier this month.) The bill broadly defines these key terms as follows:
- “Non-compete agreement” means 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.
- “Covered individual” means 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. (Notably, this broad definition appears to encompass both employees and also independent contractors.)
Simply put, if the bill becomes law – more on that below – virtually all post-employment non-compete agreements would be off-limits in New York.
That said, there are a few narrow exceptions to the bill. Namely, the bill would not apply to agreements, or provisions of agreements, (i) that prohibit disclosure of trade secrets or confidential or proprietary client information, (ii) that prohibit solicitation of the employer’s clients about whom the covered individual learned during employment, or (iii) with a covered individual that establishes a fixed term of service, in each case so long as the agreement does not otherwise restriction competition in violation of the bill.
The bill may be more noteworthy for the exceptions that it does not include, however. To that end, while the bill exempts certain client non-solicitation agreements (as noted above), it is silent as to the permissibility of employee non-solicit or no-poach agreements. Likely that issue will therefore need to be addressed by the courts. Additionally, the bill does not include a carveout permitting non-compete agreements in the context of the sale of a business. This is particularly noteworthy because even the US Federal Trade Commission’s (FTC) proposed rule barring non-compete agreements includes such an exception and, also, because New York courts have long treated sale-of-business non-compete agreements more favorably than traditional employer-employee non-competes.
For aggrieved “covered individuals,” the bill provides a private right of action with a two-year statute of limitations running from the latest-to-occur of the date on which (i) the prohibited non-compete agreement was signed, (ii) the covered individual learns of the prohibited non-compete agreement, (iii) the employment or contractual relationship is terminated, or (iv) the employer takes any step to enforce the non-compete agreement. The bill goes on to note that courts will have discretion to void any such non-compete agreement and to order all other appropriate relief, which may include enjoining conduct that violates the bill and awarding lost compensation and reasonable attorneys’ fees and costs. Additionally, the bill would require courts to automatically assess liquidated damages of up to $10,000 against any business found to be in violation.
In terms of next steps, the bill now heads to Governor Kathy Hochul’s desk for signature (and, if signed by the Governor, the bill will take effect 30 days thereafter). As the bill appears to be prospective only, it is unlikely that non-compete agreements entered into prior to the bill’s effective date – assuming it becomes law – would be impacted (as they would under the FTC’s proposed rule).
Reed Smith will continue to keep you apprised of developments regarding this bill.