Most Non-Competes May Soon be Banned in New York

New York is on the verge of joining other states in imposing significant restrictions on the use of noncompete agreements with the passage, on June 20, 2023, of Assembly Bill A01278, which adds a new section to the New York Labor Law, Section 191-d. The bill has reached the desk of Governor Hochul and she has thirty days to sign it if she wishes to do so. If she signs it, it would take effect thirty days later (the Effective Date). Although she has expressed support in the past for prohibiting non-compete agreements for lower-wage employees, it is unclear if she will sign it, as the bill is broad and covers more than such lower-wage employees.

More specifically, unlike other states’ laws, the New York bill applies to all individuals who, regardless of their contractual agreement, perform work or services for another under conditions that make them financially reliant on and obligated to perform tasks for that person. Furthermore, Section 191-d prohibits non-compete agreements for all employees regardless of their income level or job position. Moreover, the bill does not provide an exception for provisions included in negotiated severance agreements.

Section 191-d explicitly bars employers from seeking, requiring, demanding or accepting non-compete agreements from covered individuals. The term “covered individuals” appears to cover those who work in New York, although it is unclear as to whether that includes only employees or also would include independent contractors. This prohibition encompasses any provision in an agreement that restricts or prohibits the employee from securing employment of any kind after their tenure with the employer.

Section 191-d applies only to non-compete agreements “entered into or modified” on or after the Effective Date. That said, given the strong public policy against noncompetes that this bill reveals, it is possible it would affect a court’s view of the enforceability of even noncompetes entered into prior to the Effective Date. Also, it remains to be seen how courts would interpret the word “modified” in the law.

Further, Section 191-d does not prohibit employers from making agreements with potential or current covered employees that include:

1. A fixed term of service (i.e., a contract that cannot be terminated by either party before a defined date in the contract).
2. Prohibitions protecting trade secrets and confidential information.
3. Restrictions on soliciting clients of the employer that the covered individual learned about during their employment.

Moreover, although the bill does not specifically exempt noncompetes entered into in connection with the sale of a business, the bill does not explicitly prohibit them either. Given that the law seems to take aim only at employment agreements, it is possible courts would interpret the law to not apply to noncompetes in sale contracts.

Similarly, the bill does not address whether provisions intended to dissuade employees from competing, such as forfeiture of equity awards provisions, or garden leave provisions are unlawful.

Section 191-d empowers covered employees to initiate a civil action against any employer who violates the section. The lawsuit must be initiated within two years of: (1) signing the prohibited non-compete agreement; (2) becoming aware of the prohibited non-compete agreement; (3) the termination of employment or a contractual relationship; or (4) the employer taking any action to enforce the non-compete agreement. The court has the authority to void the non-compete agreement and issue appropriate relief, such as enjoining the conduct of the employer, awarding liquidated damages (up to a maximum of $10,000) and compensating the affected covered individual for lost compensation, damages, attorneys’ fees and costs.

Given the recent passage of Section 191-d, employers should consider reviewing their employment agreements for covered employees and evaluate the likelihood that the provisions would be unlawful if Section 191-d were enacted as passed, as well as strongly consider the true need for a noncompete based on the particular circumstances involving an employee. Also, employers may want to:

1. Amend existing noncompetes to include a different state’s law in the choice of law provision which state does not prohibit such agreements.
2. Consider using agreements going forward that stipulate a fixed term of service, only safeguard trade secrets and confidential information, and/or impose restrictions only on soliciting clients acquired during employment.

Employers should watch for any developments on Section 191-d, including what Governor Hochul does with it in the next few weeks and whether companies challenge the law in court. Ultimately, given the many ambiguities in the law, employers should consult experienced employment counsel.  

Co-author Lee Moylan is chair of the labor & employment practice at Klehr Harrison. Co-author Maria Kargbo is a law student at Case Western Reserve University School of Law and a participant in our Diversity Fellowship Program.