The New York State Legislature has passed a bill that will prohibit employers from entering covenants not to compete with their employees and contractors. The bill specifically exempts nondisclosure and client nonsolicitation agreements, but the bill is silent on employee nonsolicitation agreements and sale of business restrictions.

The bill is not retroactive and will go into effect 30 days after the governor signs it into law. Individuals enforcing their rights under the bill will also be entitled to liquidated damages up to $10,000, lost compensation, damages and reasonable attorneys’ fees.

If this bill becomes law, then New York joins Minnesota, California, North Dakota and Oklahoma as states that ban noncompete agreements, with certain limited exceptions.

IN DEPTH

WHAT IS AND IS NOT PERMITTED IN NEW YORK?

New York’s bill prohibits employers from seeking, requiring, demanding or accepting a noncompete agreement from any covered individual, voiding that portion of the contract.

Noncompete agreements are defined as agreements between an employer and a covered individual restricting covered individuals from obtaining employment following the conclusion of their employment with the party to the agreement. By its terms then, the bill would ban noncompete provisions that are part of separation agreements entered into in connection with the termination of employment. The bill also broadly defines a “covered individual” as any person who performs work or services for another person on terms or conditions that they are in a position of economic dependence on, and under an obligation to perform duties for, the other person. In other words, it covers all employees, and would likely be interpreted to cover certain independent contractors as well.

The bill is explicit that it does not affect any other provisions of federal, state or local law. It also states that the following agreements are still valid to the extent they do not otherwise restrict competition:

• Fixed-term agreements;
• Nondisclosure agreements, including trade secrets and other confidential and proprietary client information; and
• Nonsolicitation agreements affecting clients that the covered individual learned about during employment.

The bill makes no mention of employee nonsolicitation agreements or noncompetes entered into in connection with the sale or dissolution of a business.

ENFORCEMENT AND PENALTIES FOR VIOLATIONS

The bill grants employees a right of action to sue their employer to void the noncompete. An action may be brought within two years of the following:

• When the prohibited noncompete is signed;
• When the covered individual learns of the noncompete;
• When the employment or contractual relationship is terminated; or
• When the employer takes steps to enforce the noncompete.

The bill also creates remedies, including liquidated damages up to $10,000, lost compensation, damages and reasonable attorneys’ fees.

EFFECTIVE DATE

The New York bill takes effect 30 days after being signed by the governor, and the law will then apply to contracts entered into or modified after the effective date.

Charles Carr, a summer associate in the Chicago office, also contributed to this article.