The New York Legislature passed a bill (A01278/S3100A) that would prohibit noncompetition agreements between employers and employees by adding a new Section 191-d to the New York Labor Law. If it is signed into law by Gov. Kathy Hochul, New York will become the fifth state, after California, North Dakota, Oklahoma, and Minnesota, to ban virtually all noncompete agreements.
This new law nullifies any noncompete agreement entered into or modified after the law’s effective date, which is 30 days after it is signed into law. The law is not retroactive, as existing noncompete agreements would remain enforceable, but going forward, employers would be prohibited from imposing such restrictions on employees or modifying existing agreements.
This bill would represent a huge change for New York’s employers and employees alike. New York’s existing laws on noncompetes largely permit employers and employees to enter into noncompete agreements as long as they are reasonable, narrowly tailored, and serve a legitimate business purpose. Prior to this legislation, as a general matter, New York courts have held that restrictive covenant provisions, such as noncompete agreements, may be enforced if (1) reasonable in duration and geographic scope, (2) necessary to protect the employer’s legitimate interests, (3) not harmful to the public and (4) not unreasonably burdensome to the employee.
The legislation is broad and provides for a private right of action for employees to seek court intervention where an employer violates the law. The text of the law covers any person who performs work for an employer and bans 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.” Any provision that restrains an individual from working in a lawful position will be void. Employees would have two years to file suit from any of the following dates: (1) when the agreement was signed, (2) when the individual learns of the restriction, (3) when the employee’s employment is terminated or (4) when the employer takes any step to enforce the noncompete.
If successful, the employee can be awarded all appropriate relief. Specifically, the law permits a court to order an employer to stop attempting to enforce the agreement, pay liquidated damages up to $10,000, pay lost compensation, damages, attorneys’ fees and costs.
The legislation includes two narrow exceptions. First, the bill allows employers to enter into agreements in which employees are prohibited from disclosing trade secrets, or confidential or proprietary information. Second, the legislation permits employers and employees to enter into non-solicitation agreements barring the employee from soliciting the employer’s clients, as long as the prohibition is limited to clients that the worker learned about while engaged by the employer.
Notably, the list of exceptions does not include noncompete agreements executed in connection with the sale of a business. Further, the legislation is silent on whether employers can enter into no-poach agreements. In these agreements, employees are prohibited from soliciting the employer’s employees to leave the employer and join a competitor. Because of the broad nature of the legislation’s language, it would seem that such agreements are now void, but this issue will likely need to be resolved by the courts.
New York Labor Law Section 202-k currently bans noncompete agreements for certain broadcast industry employees. This amendment is intended to supplant former Labor Law Section 202-k. However, if new Section 191-d is found to be invalid, Section 202-k will remain in effect. In general, the bill also provides that if any of its provisions are found to be invalid, they will be considered severable, and the remainder of the law will remain intact.
New York’s new bill follows a national trend towards limiting noncompetes. In Memorandum GC-23-08, dated May 30, 2023, the General Counsel of the National Labor Relations Board indicated that noncompetes may violate federal labor law, and at the beginning of this year the Federal Trade Commission (FTC) proposed a rule to ban new and existing noncompete agreements across the country. The issuance of the FTC’s rule is delayed and is not expected until at least April 2024 (and is likely to be challenged in court). In the meantime, employers should be ready to react to the changing landscape and reach out to counsel to determine whether they should revise their employee restrictive covenant agreements.
[View source.]
