Last month, New York's legislature passed a bill that, if enacted, will substantially prohibit employers from entering into non-competition agreements with their employees. Governor Kathy Hochul is expected to eventually sign the bill, which will create a seismic shift in New York's non-competition agreement landscape.

Below are some of the critical questions employers should consider now to prepare for New York's new normal for non-competition agreements.

Question 1: What will the law prohibit?

In its current form, the bill prohibits employers from seeking, requiring, demanding, or accepting a "noncompete agreement" with a "covered individual." As defined within the bill:

• A prohibited "noncompete agreement" is "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."

• A "covered individual" is "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."

Those definitions can be a mouthful. Boiled down, they mean that New York employers will likely be prohibited from entering into or seeking an agreement with an individual that restricts the individual's ability to obtain employment with a new employer after the conclusion of the original employment relationship.

Question 2: What will still be allowed under the law?

The bill contains limited exceptions, expressly allowing agreements with covered individuals that: (1) establish a fixed term of service by the individual; (2) prohibit disclosure of trade secrets and/or other confidential information; or (3) prohibit the solicitation of an employer's clients to which the covered individual was introduced by virtue of the employment relationship, provided the agreement does not otherwise restrain competition.

These exceptions may prove important for employers seeking to protect their proprietary and other confidential information. The "fixed term of service" exception suggests that garden leave clauses — contracts under which an employee must provide notice of his/her resignation before competing in the marketplace — will be permitted. This interpretation is further supported by the definition of "noncompete agreement," which is expressly limited to restrictions on finding employment "after the conclusion of employment with the employer included as a party to the agreement." The other exceptions further suggest that non-disclosure and client non-solicitation agreements will also continue to be enforced, provided they do not violate New York's traditional tests for reasonableness in geographic scope and duration.

But the exceptions to the non-competition ban may not end there. The definition of covered individual suggests that the bill will not apply to non-competition agreements ancillary to the sale of a business — a prohibition that might otherwise stifle business sale transactions in New York. In addition, the "fixed term of service" exception may open the door for an employee's non-competition promise in exchange for an employer's promise to employ the employee for a specific period of time. Employers are generally loath to waive the presumption of at-will employment, but in some circumstances, they may want to consider promising a "fixed term of service" in order to secure an employee's promise not to compete afterward.

Question 3: Will the law prohibit non-competition agreements executed before the law becomes effective?

No. As currently drafted, the bill will only apply prospectively to non-competition agreements executed after the bill becomes effective law. The effective date is currently scheduled for 30 days from the Governor's signature, whenever that may be.

Question 4: Will the law apply to independent contractors and other non-employees?

Yes. As noted above, the definition of covered individual includes anyone performing services for another party. There is little doubt this applies to independent contractors. And in any event, New York courts generally disfavor non-competition agreements for independent contractors, except in very narrow circumstances. Therefore, even in the unlikely event that the bill never becomes law, non-competition agreements with independent contractors will remain unenforceable in most situations.

Question 5: What are the potential enforcement mechanisms and penalties to employers?

The bill affords covered individuals a private right of action to sue for invalidation of a prohibited non-competition agreement. The statute of limitations runs for two years from the later of: (1) the signature of the non-competition agreement; (2) the covered individual's first discovery of the non-competition agreement; (3) the termination of the business relationship with the covered individual; or (4) the employer's first effort to enforce the non-competition agreement.

The bill also allows courts to void prohibited non-competition agreements and award "appropriate relief," including liquidated damages (capped at $10,000), lost compensation, and reasonable attorneys' fees and other costs. In particular, the attorneys' fee component raises the stakes for employers, insofar as they may be on the hook for a substantial fee award if they insist on enforcing a non-competition agreement that is ultimately unenforceable.

Question 6: If a contract includes an unenforceable non-competition agreement, will the entire contract be void under the new law?

Very likely not. The current bill sets forth that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." (emphasis added) It is too early to tell how a court may interpret the new law, but "to that extent void" suggests that only the prohibited portion of a contract will be voided under the new law. Further, New York courts have long recognized a court's ability to equitably reform a contract containing an unenforceable clause, such that the balance of the contract remains in effect.

Question 7: What should employers do now to prepare for the new law?

Change is coming to New York's non-competition rules in one form or another. Savvy employers should consider the following steps to prepare for the new non-competition agreement landscape:

• Execute non-competition agreements now, before the bill becomes law.
• Consider the benefits of garden leave clauses, under which employees may be required to provide notice of their resignation before being allowed to work for a competitor.
• Consider whether the value of an employee's non-competition promise is worth promising the employee a "fixed term of service," such that the employee will not be employed "at-will."
• Execute appropriate non-disclosure and non-solicitation agreements in order to protect against the disclosure of trade secrets and other confidential information and the poaching of clients to which employees and service providers are introduced by virtue of the employment or independent contractor relationship.