The New York State Senate and New York State Assembly recently passed legislation (Bill S3100A and Bill A1278A) that would prohibit the use of non-competition agreements entirely. If the legislation is signed into law by Governor Kathy Hochul, which is expected, New York would become the fifth state—behind California, Oklahoma, North Dakota and Minnesota—to implement a complete ban on non-competition agreements. Under the proposed law:
- Businesses would be prohibited from entering into a non-compete agreement with any “covered individual,” defined as any person, whether or not employed under an employment agreement, who performs work or services (including independent contractors);
- Covered individuals would have a private cause of action against businesses for violating this law. Workers would have two years from (i) the date the prohibited non-compete agreement was signed; (ii) the date the worker learns of the prohibited non-compete agreement; (iii) the date employment or the contractual relationship is terminated; or (iv) the date the business takes any step to enforce the non-compete agreement, to file a lawsuit;
- Businesses would be subject to up to $10,000 in liquidated damages for each violation, as well as payment for lost compensation, damages, and attorneys’ fees and costs;
- The proposed non-compete ban would not impact valid and enforceable: (i) confidentiality agreements prohibiting the disclosure of trade secrets or other proprietary employer information, and (ii) customer non-solicitation agreements (protecting customers that the worker learned about during employment or while providing services), as long as the agreement does not “otherwise restrict competition”; and
- There is no language specifying that the ban would apply retroactively to non-compete agreements that were entered into prior to its effective date.
While the fundamental provisions of the new law are clear, it is silent on several key points, including whether the ban applies: (i) to only “covered individuals” working or providing services in New York (as opposed to any service provider working for a New York employer or business); (ii) whether it could be interpreted to apply retroactively to agreements entered into prior to the effective date of the new law (in its current form, there is no requirement that non-competes already entered into must be rescinded); and (iii) to non-compete agreements entered into in the context of the sale of a business, leaving its effect on corporate transactions in limbo. If the proposed law is enacted, it is likely that interpretive administrative guidance will be issued.
New York’s attack on non-competes follows a nationwide wave of legislation and federal agency action aimed at restricting, and in some cases, banning, the use of non-competition agreements. For example, employer-employee non-compete agreements are void in Minnesota as of July 1, 2023, the Federal Trade Commission recently proposed a rule that would ban employers from imposing non-compete agreements on their workers (as discussed in Fenwick’s prior alert), and the National Labor Relations Board’s General Counsel has opined that most non-compete agreements violate the National Labor Relations Act.
The proposed law now heads to Governor Kathy Hochul’s desk for her signature. Employers should be mindful of the proposed ban and commence review of their employment and contractor agreements to determine whether revisions are prudent.
Fenwick will continue to monitor the status of the proposed law and report on future developments.