New York Is Close to Waving Bye to Non-Compete Agreements.

Pending Governor Hochul’s signature, New York may soon join California and three other states in banning noncompete provisions in employment agreements. On June 20, 2023, the Assembly passed the bill that would prospectively prohibit employers from demanding, requiring, or accepting noncompete agreements from certain “covered individuals.”

In contrast to several other states that recently passed laws limiting noncompete agreements, New York’s expected amendment of Section 191-d of the New York Labor Code would not only outright prohibit noncompete clauses, irrespective of the salary level or job function of the covered individual, but it would also create a private cause of action for violation of the new law.

Terminology

For the purposes of the new Section 191-d, non-compete agreements are defined 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.” While the term “prohibits” is fairly easy to interpret, “restricts” leaves room for interpretation.

In turn, covered individual “means 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.”

No Retroactive Application

As the initial matter, the restrictions of the expected new law only apply to contracts “entered into or modified” once Section 191-d takes effect. The previously entered agreements and any pending litigation dealing with restrictive covenants should not be affected by these changes. The new Section 191-d would not become effective until 30 days after it is signed by the Governor. It is possible that other changes are made to the bill before it becomes law if the Governor signs it subject to such changes. In that event, it is likely that the bill would not become law until next year when New York legislature reconvenes.

What Would It Prohibit

The new law essentially serves as a complete ban of non-compete agreements. It provides in § 191-d(3) that “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.” It further adds that “[n]o employer . . . shall seek, require, demand or accept a non-compete agreement from any covered individual.” While the language leaves some ambiguity on the issue, it is likely that the definition of a “covered individual” would encompass both employees and independent contractors.

What Would Still Be Permitted

Section 191-d(5) provides that the new law would not affect “the ability of an employer to enter into an agreement with a prospective or current covered individual that establishes a fixed term of service.” It does not ban agreements that prevent the “disclosure of trade secrets, [or] disclosure of confidential and proprietary client information.” Finally, it does not ban agreements that prohibit the “solicitation of clients of the employer that the covered individual learned about during employment.” The bill does not mention prohibitions on solicitation of employees.

Unlike its California counterpart, which codifies certain exceptions for the sale of a business or the dissolution of a partnership or limited liability company, Section 191-d does not explicitly exempt those situations. See BPC § 16600 et seq. The definition of a covered individual, however, suggests that the prohibition may not extend to noncompete restrictions after the sale of a business.

The definition of the “non-compete agreement” also only covers restrictions “after the conclusion of the employment.” This leaves it unclear how the law applies to compensated noncompete agreements such as garden leaves or advanced notice resignations. In other words, those situations are arguably not covered as the restriction does not seek to prohibit or restrict competition after the employment is terminated.

Private Right of Action

For the employers who neglect to revise their employment contracts once the new law takes effect, the ramifications can be serious. The new law would create a private right of action, allowing covered individuals to bring a civil action against an employer for monetary damages and injunctive relief. The two-year statute of limitations during which one can bring an action under Section 191-d is triggered by the latest date that a covered person (1) signed the noncompete agreement, (2) learned about the noncompete agreement, (3) terminated employment, or (4) from when the employer attempts to enforce the noncompete agreement. § 191-d(4)(A).

The relief available to those who pursue an action under this section is drastic. Aside from voiding the noncompete clause, the court may order payment of liquidated damages, attorneys’ fees and costs, lost compensation, and other damages. § 191-d(4)(A). The liquidated damages that the court “shall award . . . to every covered individual” can be up to $10,000. § 191-d(4)(B). The term shall indicates that courts would not have discretion in whether to award liquidated damages, while the exact amount would be the court to determine.

The bill leaves some ambiguity as to its application and, regardless of any further changes before it potentially becomes law, one can expect further clarification about the extent of the restrictions to be done through developing caselaw.