At the conclusion of the 2023 New York legislative session, the New York State Senate and Assembly passed a bill that, if signed by New York Governor Kathy Hochul, will prohibit employers from entering agreements that prohibit or restrict covered individuals from obtaining future employment.

NEW NONCOMPETE LEGISLATION

On June 20, 2023, in a session scheduled after the New York State Assembly adjourned for the year, the Assembly passed significant noncompete legislation that, if signed by Governor Hochul, will prohibit employers from entering into noncompete agreements. The bill, A1278B/S3100A, which previously passed the New York State Senate, would take effect 30 days after the governor signs it.

The bill could be modified before the governor signs it, but if she does sign it in its current form, it would apply prospectively to agreements entered into or modified on or after its effective date.

The bill would create a new section of the New York Labor Law, NY Lab Law 191-d, prohibiting employers from seeking, requiring, demanding, or accepting a “noncompete agreement” from any “covered individual.” Those terms are defined broadly as follows:

• 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.” (emphasis added)
• 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.”

The bill further provides 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.” Employers and individuals would be prohibited from seeking, requiring, demanding, or accepting a noncompete agreement from any covered individual. Taking these provisions together, the bill would prospectively prohibit employers from having workers enter any noncompetition agreement, and it voids any such agreements entered into or modified following the effective date.

The bill contains limited carveout language, stating that it should not “be construed or interpreted as affecting any other provision of federal, state, or local law, rule, or regulation relating to the ability of an employer to enter into an agreement” that (1) establishes a fixed term of service; (2) prohibits disclosure of trade secrets or confidential/proprietary client information; or (3) prohibits solicitation of clients of the employer that the covered individual learned about during employment, provided that such agreement does not otherwise restrict competition.

In other words, although the bill does not expressly state that confidentiality and client nonsolicitation agreements are permissible, it appears to support that interpretation, as it is not intended to modify the rights of an employer to enter those agreements under applicable law. The bill also contains a carveout for existing law covering broadcast employees. The bill is silent regarding restrictions on solicitation of employees.

ENFORCEMENT

The bill would create a private right of action with a two-year statute of limitations that runs from the later of when the noncompete was signed, when the covered individual learns of the noncompete, when the employment or contractor relationship is terminated, or when the employer takes any step to enforce the noncompete.

The bill also would provide courts with the jurisdiction to void a noncompete agreement and to order “appropriate relief,” including injunctive relief, liquidated damages (up to $10,000), lost compensation, damages, and reasonable attorney fees and costs.

ANALYSIS

If this bill becomes law, New York State will join a growing group of jurisdictions to pass laws that ban noncompete agreements outright, including California, North Dakota, Oklahoma, and Minnesota. Additionally, multiple other states significantly restrict their use, potentially by establishing minimum compensation thresholds for employees bound by a noncompete, including Colorado, Illinois, Maine, Massachusetts, New Hampshire, Oregon, Rhode Island, Virginia, and Washington.

The bill also comes on the heels of administrative agency efforts by the Federal Trade Commission and General Counsel of the National Labor Relations Board to minimize employers’ use of noncompete agreements. 

The bill does not, however, purport to cover all forms of restrictive covenants. There is no indication that the bill is intended to restrict the use of noncompetition agreements in the sale-of-business context. Rather, the definition of who is a “Covered Individual” is restricted to individuals performing services for an organization who also rely economically on that organization. It does not restrict noncompete agreements made between separate individuals or entities that do not have an existing work or services relationship.

Additionally, as the bill only applies to contracts that prohibit or restrict individuals from engaging in a new job after their current job ends, it does not appear to restrict the use of a garden leave or reasonable notice period requirement. Thus, employers may consider whether to implement provisions in employment agreements that require individuals to give notice in advance of their expected separation date and the employer would continue to pay the individual for that notice period.

The bill also has some ambiguous language regarding the types of agreements it seeks to prohibit. The bill states that employers shall not enter agreements that “prohibit or restrict” individuals from obtaining employment after the conclusion of their current employment, but there is no corresponding definition of the term “restrict.” Without this clarifying definition, it is unclear exactly what types of agreements outside of a traditional noncompete agreement might fall within the ambit of the proposed law.

The Senate and Assembly will now decide when to send the bill to Governor Hochul—which may take some time and is at the discretion of the legislative leadership. As numerous Assembly representatives stated their intent to continue working on the bill, it is possible that the legislature will propose additional changes to the governor.

Once the legislature sends the bill to Governor Hochul, she will have 30 days to sign or veto it. Governor Hochul may also sign the bill subject to agreed-upon changes, which would then be passed by the legislature during the next session. (New York regularly uses this process, referred to as “Chapter Amendments,” when finalizing bills passed by the legislature.)

However, as the legislature does not reconvene until January 2024, to the extent Governor Hochul does not sign the bill or proposes Chapter Amendments, any veto override or amendments may not take place—and the bill would not become law—until next year.

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