The New York State legislature passed a bill which, if signed into law, will ban employers from entering into non-compete agreements with any person who, whether or not employed under a contract of employment, performs work or services for the employer. Governor Kathy Hochul is expected to sign the bill into law, although it is possible that Governor Hochul will require modifications to the proposed bill.
The non-compete ban will take effect 30 days after the Governor signs the bill into law. The law will apply to employment agreements entered into or modified, on or after the effective date. The new law would not void existing non-compete agreements.
The proposed law will prohibit an employer, its agent, or the officer or agent of any corporation, partnership, limited liability company, or other entity from seeking, requiring, demanding, or accepting a non-compete agreement from any covered individual.
A “covered individual” under is defined broadly to include both employees and independent contractors.
A “non-compete agreement” broadly encompasses any agreement, or clause within any agreement between an employer and a covered individual that prohibits or restricts the covered individual from obtaining employment after ending their employment with the employer included as a party to the agreement.
Further, any agreement that contains restrictive covenants restraining anyone from engaging in a lawful profession, trade, or business of any kind is to that extent void under the proposed law.
Confidentiality and other covenants remain enforceable
Employers can still enter into an agreement with a covered individual that establishes a fixed term of service, or an agreement that prohibits the disclosure of trade secrets, confidential and proprietary client information, or the solicitation of an employer’s clients, provided that such agreement does not otherwise restrict competition.
Bill is Silent on Non-Competes in the M&A Context
The New York proposed law does not address non-competition covenants entered into in the context of a merger, acquisition, or other change of control. In California and elsewhere, a business seller can be prohibited from competing with the business’s buyer.
Enforcement; Private Right of Action
Covered individuals can bring legal action against employers who violate the law. The court may
void any non-compete agreement that violates the law. The court may also order payment of liquidated damages of an amount not more than $10,000, among other remedies.
The proposed New York prohibition on employee non-compete covenants represents a sea change for employers in New York. The momentum against non-compete arrangements in the employment context has clearly gained strength in the past few months as many other states, as well as the federal government, are tightening enforcement of employment-related non-competition agreements.
We strongly urge every employer to seek legal counsel before attempting to bind an employee or a contractor to a non-competition covenant as state laws vary widely and change frequently.