Article by: Associate Michael A. Carlin

In a post-adjournment session on June 20, 2023, the New York State Assembly took a significant step toward banning employers from requiring employees to enter into non-compete agreements.

The bill, A1278B/S3100A, has passed the New York State Assembly and previously passed the Senate. It is now awaiting further possible amendments in the Senate before heading to the Governor.

What Does This Proposed Legislation Ban?

This proposed legislation will prevent employers from pursuing, mandating, or accepting a “non-compete agreement” from any “covered individual”. A “non-compete agreement”, is defined as “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.”

The bill also declares any contract entered or amended after the effective date of the legislation that hinders anyone from practicing a lawful profession, trade, or business to be null and void. Essentially, the bill intends to stop employers from making employees sign any non-competition agreements in the future and invalidate any such agreements that are formed or revised after their effective date. The bill solely applies to contracts that limit individuals from starting a new job after their current one concludes.

Who Would the Proposed Legislation Cover?

As currently written, the term “covered individual” is defined very broadly as “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.” This broad definition could be interpreted to cover not just employees but also independent contractors, thereby significantly broadening the impact of this legislation on businesses.

Exceptions to NY’s Proposed Ban on Non-Competes

The bill does feature certain exemptions. For instance, it does not alter any other federal, state, or local law clause related to the employer’s ability to make agreements that (1) define a specific service tenure, (2) forbid revealing trade secrets or private client details, or (3) prevent solicitation of the employer’s clients discovered during the employee’s term, as long as such agreements do not limit competition. In other words, even though the bill doesn’t explicitly permit confidentiality and client non-solicitation agreements, it seems to indirectly endorse them. It also allows for current laws governing broadcast employees and is silent on the restriction of employee solicitation.

Moreover, the bill doesn’t seek to limit all forms of restrictive covenants. There is no indication that it intends to limit the use of non-competition agreements in business transactions. The term “Covered Individual” only applies to those working for an organization and financially reliant on it. It does not limit non-compete agreements between separate individuals or entities without an existing work or service relationship.

Proposed Penalties for Violation

As far as enforcement is concerned, the bill provides a private right of action with a two-year statute of limitations, which starts either when the non-compete is signed, when the employee learns of the non-compete, when the job or contractor relationship ends, or when the employer attempts to enforce the non-compete. Courts will have the power to invalidate a non-compete agreement and order suitable relief, which could include injunctions, lost wages, damages, and reasonable legal fees and expenses.

Additionally, the bill provides courts with the authority to order the offending employer to pay liquidated damages to the affected workers. The bill does not provide guidelines for how courts should arrive at the penalty amount, but it does provide that such penalties are not to exceed $10,000. This penalty would be in addition to any other remedies, such as lost compensation, damages, and reasonable attorney fees and costs.

Part of Larger Movement Against Non-Competes

If this bill becomes law, New York will join several other states, namely California, North Dakota, Oklahoma, and Minnesota, that have prohibited non-compete agreements. Several other states, including Colorado, Illinois, Maine, Massachusetts, New Hampshire, Oregon, Rhode Island, Virginia, and Washington, have imposed considerable restrictions on the use of such agreements.

This bill also aligns with efforts by the Federal Trade Commission to curb the use of non-compete agreements by employers.

The decision on when to present the bill to Governor Hochul now rests with the Senate and Assembly and is likely to take some time. As multiple Assembly representatives expressed their intention to further refine the bill, the legislature might propose additional modifications. Once the legislature submits the bill to the Governor of New York, she will have 30 days to either sign or veto it. The Governor might also agree to sign the bill subject to certain amendments, which the legislature will then pass in the next session.