On Dec. 22, 2023, Gov. Kathy Hochul (D-NY) vetoed a bill to outlaw all noncompete clauses in the state of New York. The law also would have vacated all current agreements that prevent workers from leaving their employers for competitors. While supporters of the bill claimed that the legislation would increase wages and increase innovation, the business community contended that the change would risk trade secrets and harm employee retention.
Noncompete limitations like those in New York likely open the door for other states and the federal government to follow suit. In fact, both groups have made their opening salvos in this policy area. These actions pose a substantial risk to organizations looking to protect their products and employees. Last year ended on a win for businesses, but 2024 promises to bring more battles in the noncompete space.
New York Noncompete Legislation Background
In June 2023, the New York legislature passed a bill that would have banned the use of noncompete agreements for all workers regardless of compensation. The bill (S.3100), introduced by State Sen. Sean Ryan (D-NY-61), and its companion measure (A. 1278), introduced by Assemblymember Latoya Joyner (D-NY-077), had received strong support from progressives who argued that such agreements are burdensome for low-wage workers. However, the measure faced fierce resistance from business groups that warned that the legislation would push jobs out of the state. In late November 2023, Gov. Kathy Hochul indicated that she wanted to see a compensation cap for such a ban, initially floating $250,000 as a level above which noncompete agreements would be allowed. The governor’s public comments and a lobbying campaign on both sides of the issue set the stage for compromise negotiations once the bill was officially delivered to the governor’s desk on Dec. 12, 2023. At that point, Gov. Hochul had 10 days to veto the bill, sign it without amendment, or sign it with amendments. It was announced on Dec. 22, 2023, the deadline for the governor to act, that Gov. Hochul had vetoed the bill.
Compromise Negotiations
Gov. Hochul sought to negotiate amendments to win the support of business groups and the Democratic state lawmakers who sponsored the legislation. Negotiations lasted throughout the week of Dec. 18, but the governor’s office and the legislature were unable to reach an agreement. Both sides remained far apart on an income threshold that would see the ban only applied to low-wage workers. The governor’s office pushed for a $250,000 threshold while Senate Democrats pushed for a threshold ranging from $300,000 to $500,000. The negotiators were also unable to agree on how bonuses, stock options and other forms of compensation should be counted toward the threshold. In her veto statement, Gov. Hochul said, “New York has a highly competitive economic climate and is home to many different industries. These companies have legitimate interests that cannot be met with the Legislation’s one-size-fits-all approach.”
Next Steps for New York Legislation
Gov. Hochul has been clear that she wants to reach a compromise that would allow New York businesses to use noncompete clauses to retain highly compensated workers. Meanwhile, state Sen. Ryan (D-NY-61) said he was disappointed by the governor’s veto, and he intends to reintroduce the noncompete ban legislation after the legislature reconvenes on Jan. 4, 2024. Advocacy groups that support the measure, like the National Employment Law Project, stated they intend to continue campaigning for more robust legislation in the coming year without any income thresholds. The New York state legislature is currently scheduled to remain in session through the first week of June 2024, although bills can be delivered to the governor’s desk well beyond that date.
Noncompete Ban Legislative and Regulatory Landscape
While the New York legislature continues debating the future of noncompete clauses, the federal government may soon act to curtail their use. The Federal Trade Commission (FTC) is expected to soon complete a rulemaking that could create a nationwide ban on noncompete clauses. On Jan. 5, 2023, the FTC issued a proposed rule seeking to categorically ban nearly all employer noncompete agreements nationwide. If finalized in its proposed form, the rule would: (1) prohibit employers from entering into virtually all noncompete agreements with all workers, (2) require employers to rescind existing noncompete agreements, and (3) require employers to notify past and current employees that their noncompete obligations are no longer in effect. The proposed rule is based on the FTC’s interpretation of Section 5 of the Federal Trade Commission Act’s directive to prevent unfair competition, a controversial position that will face significant legal challenges. Due to the large volume of public comments received, the final rule will likely be published in April 2024.
The FTC is also racing to finalize the rulemaking by early summer to avoid the threat of repeal through the Congressional Review Act (CRA). Under the CRA, Congress can overturn certain federal rulemakings if both chambers adopt a joint resolution of disapproval and it is signed by the president, or Congress successfully overrides a presidential veto. Congress is time limited to the first 60 days of continuous session after a rule is submitted (typically the date the rule is published) to use the CRA disapproval procedure. Note, “continuous session” includes every calendar day, including holidays and weekends, but excludes any day during which one or both of the chambers is adjourned for more than three days. The CRA is most frequently used when there is a change in administration, and it has been used to overturn 20 rules in the past, including 16 in the 115th Congress (2017-2018) and three in the 117th Congress (2021-2022).
Regulations at the state and federal levels to limit noncompete agreements will continue to develop throughout 2024. These changes may incur additional costs and risks for businesses in virtually all industries.
