The New York State Assembly, during a special legislative session last month, passed a bill that, if signed by the governor, will prohibit nearly all noncompete agreements for workers. With the passage of the bill, New York is poised to join California and a handful of other states that have banned noncompetes regardless of salary level or job function.
Broad Ban on Noncompetes
The bill contains a near-total ban of noncompete agreements for employees, and potentially independent contractors, based in New York. On and after the effective date of the law, which will be 30 days after signature by the governor, employers may not enter into a “noncompete agreement” with a “covered individual,” or modify an existing agreement. The law, therefore, would not be retroactive and not nullify agreements entered in prior to the effective date. But it would prohibit new agreements going forward or the modification of existing agreements.
A “noncompete agreement” is defined by the bill as “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 the employment.” A “covered individual” is defined as any “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 definition of a “covered individual” includes employees, but could also include independent contracts who are in a position of “economic dependence” on the employer.
Exceptions
The bill contains a few exceptions. It does not ban agreements prohibiting 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.
Notably absent from the bill, however, are provisions permitting a noncompete in connection with the sale of a business or addressing employee nonsolicitation agreements.
Open Questions
A number of questions will need to be answered, either through regulation, interpretive guidance or litigation. First, as noted, there is a significant question as to whether an agreement entered into as part of the sale of a business, or among partners in a partnership, would be prohibited by the law. An argument could be made that such agreements fall completely outside the scope of the bill, since they are not entered into between an “employer” and a “covered individual.” However, the bill also states more broadly that “every contract by which anyone is restrained from engaging in a lawful profession, trade of business of any kind is to that extent void.” It therefore will remain to be seen whether the new law would be applied in those circumstances. Moreover, the statute does not address forfeiture-for-competition agreements, nor “garden leave” provisions, leaving open the question whether those would be permissible under the bill
Remedies
Covered individuals would have the right to sue in court for any violations of the law. An aggrieved worker would be entitled to “all appropriate relief,” including injunctive relief, lost compensation and attorneys’ fees. In addition, the bill provides for liquidated damages up to $10,000. While the award of liquidated damages appears mandatory, there is no guidance to courts on how such damages should be calculated.
Any suit would need to be brought within two years of the later of: the date the unlawful noncompete was signed; when the individual learns of the unlawful noncompete; the date the employment or contractual relationship ends; or when the employer takes steps to try to enforce the noncompete agreement.
Employer Takeaways
New York’s action comes at a time when noncompetes are increasingly under attack at the federal and state level. Notably, the Federal Trade Commission has issued a proposed rule to largely ban noncompetes; the General Counsel of the National Labor Relations Board has recently issued a memorandum asserting that noncompetes generally violate the National Labor Relations Act and bills are pending in states across the country to limit, if not ban, the use of noncompetes.
Employers must be aware of this changing legal landscape and should be proactively gathering information about their use of various noncompete agreements – creating a list of such agreements and noting information such as employee name, position, work location and salary to help identify agreements that might be at risk. Employers should also begin considering alternative strategies to protect confidential information, customers and employees in the event their agreements could be nullified in the future.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
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