New York is on the brink of joining the growing list of states and federal agencies that disfavor or outright ban non-compete agreements. On June 20, 2023, the New York legislature passed a bill that would prohibit employers in the state from using non-compete agreements. The bill now awaits final approval by Governor Kathy Hochul.
Specifically, under Bill No. A01278 , no employer would be allowed to “seek, require, demand or accept” a non-compete agreement from any covered individual. The bill also would void every contract to the extent “anyone is restrained from engaging in a lawful profession, trade, or business of any kind[.]” Accordingly, the law, if signed by the Governor, will ban the use of non-competes in future agreements.
The bill defines a "covered individual" as any person who performs work or services for another person on such terms and conditions that they are in a position of economic dependence on, and under an obligation to perform duties for, that other person. Unlike some states, the bill does not include any salary thresholds and applies equally to all “covered individuals.” Thus, in practical terms, the law covers essentially all employees and, potentially other types of workers due to the broad definition of covered individuals.
The definition of “non-compete agreement” is similarly broad. It includes any agreement that prohibits or restricts a covered individual from obtaining employment after the conclusion of employment with the employer.
The bill creates a private cause of action for aggrieved employees, who will be entitled to injunctive relief, as well as recovery of lost wages, damages, reasonable attorneys’ fees, and costs. Additionally, the bill requires that courts “shall award” liquidated damages up to $10,000, in addition to all other applicable relief. As a result, the penalties for violating the proposed law could be quite steep.
Claims will be subject to a two-year statute of limitations that begins on the later of: (i) when the non-compete was signed; (ii) when the employee learns of the prohibited non-compete; (iii) when the employment or contractual relationship is terminated; or (iv) when the employer takes any step to enforce the non-compete agreement.
Notwithstanding the broad ban on non-competition agreements, the bill permits an “employer to enter into an agreement with a prospective or current covered individual that establishes a fixed term of service or prohibits disclosure of trade secrets, disclosure of confidential and proprietary client information, or solicitation of clients of the employer that the covered individual learned about during employment, provided that such agreement does not otherwise restrict competition.” Practically speaking though, an overly broad non-solicitation provision could be voided under the law if it has the effect of restraining the employee from engaging in his or her chosen profession. This is the same type of functional test outlined by the Federal Trade Commission (FTC) in its January 5 proposed rule banning non-competes. See further discussion of the FTC proposed rule here . The bill is silent as to any exception for covered individuals who are sellers of a business and also does not expressly address the treatment of employee non-solicitation provisions.
If signed, the bill will become effective on the 30th day after it becomes law and is “applicable to contracts entered into or modified on or after” the effective date. Therefore, employers will have a limited window to update any agreements that contain restrictive covenants. However, it would not apply retroactively, so existing non-competition agreements would remain valid.
The bill comes on the heels of the FTC’s proposed rule and the National Labor Relation Board’s General Counsel’s memo opining that non-competes violate federal labor law on May 30. Likewise, other states, such as Minnesota, California, and Illinois have imposed total or partial prohibitions on restrictive covenants, as the nation moves away from the use of such clauses.
