Executive Summary: This month both the New York State (NYS) Senate and the NYS Assembly passed identical bills that effectively ban all noncompete agreements in the state of New York. If signed by Governor Kathy Hochul, the legislation would become Section 191-d of New York Labor Law, effective 30 days after its signing.
The proposed law broadly defines a noncompete agreement to include:
Any agreement or clause contained in any agreement, between an employee and a covered individual that prohibits or restricts each covered individual from obtaining employment, after the conclusion of employment with the employer included as a party to the agreement.
This law would dramatically change how employers may address post-employment restrictions on their employees by:
- Prohibiting employers from seeking, requiring, demanding, or accepting a noncompete agreement from 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.
- Voiding every contract in which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.
- Creating a civil cause of action against employers or persons alleged to have violated this law, allowing an employee to seek injunctive relief and recover compensatory damages, liquidated damages up to $10,000, and attorneys’ fees and costs.
- Creating a new statute of limitations for such civil action to be the later of two years after (1) the prohibited noncompete agreement was signed; (2) the covered individual learns of the prohibited noncompete agreement; (3) the employment or contractual relationship was terminated; or (4) the employer takes any step to enforce the noncompete agreement.
On its face, this legislation raises many questions that need to be answered, including the following:
- Will the prohibitions also apply in the context of the sale of a business?
- Will the prohibitions apply to noncompetition restrictions in an incentive award or benefit plan where forfeitures for competition have been allowed?
- Will the prohibitions apply in a true independent contractor relationship?
- Will employees argue that noncompete provisions in agreements entered into before the effective date of the law are void as a matter of public policy and should not be enforced by the court?
- How will employers adapt their confidentiality and nondisclosure and nonsolicitation covenants to protect themselves against the inevitable disclosure of proprietary information to competitors and post-employment fiduciary duty breaches by a former employee?
The Bottom Line
If signed by the Governor, this law would change the landscape for post-employment restrictive covenants, with national implications for all agreements where New York law is the governing law for the agreement. Historically, restrictive covenants have been used by employers to limit actions employees might take after their employment ends, which could harm the employer and its business. A noncompete covenant sidelined the employee until the covenant’s restriction period expired. This gave the employer time to protect the investment it had made in its business, its services and products, and its market share. If this law passes, employers will have to find creative new ways to accomplish these goals.
We will continue to keep you informed of the status of this bill. If you have any questions regarding the bill or other issues impacting New York employers, please contact the authors of this alert, Richard Bahrenburg, a Senior Associate in our New York City office at rbahrenburg@fordharrison.com and Stephen Zweig, Partner in our New York City office at szweig@fordharrison.com. Of course, you can also contact the FordHarrison attorney with whom you usually work.