New York’s Imminent Non-Compete Ban

New York State is poised to join a growing number of states banning outright nearly all non-compete agreements. The New York State legislature has passed a bill banning almost all non-compete agreements for all workers, regardless of their salary level or job function. The bill now sits with Democratic Gov. Kathy Hochul, awaiting action.

Notably, in January 2022, Gov. Hochul announced that she supported a non-compete ban for low-wage workers. If the Governor signs the bill, it would become effective 30 days later and amend New York Labor Law to make any non-compete agreement signed or modified after the bill’s effective date unlawful.

Applicability and Scope

The bill functions as a near total ban of non-compete agreements for employees or contractors based in New York. It provides that 

Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.¹ … [N]o employer or its agent, or the officer or  agent of  any  corporation,  partnership,  limited liability company, or other entity, shall seek, require, demand, or accept a non-compete agreement from any covered individual under the new law.²

Two terms in the above statutory language are broadly defined and worth employers’ careful attention. First, “non-compete agreement” means 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. Second, “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 the individual is, in relation to that other person, in a position of economic dependence on, and under an obligation to perform duties for, that other person.

Exclusions

There are only a few express exceptions to this near-total ban on non-competes, so long as the agreements do not “otherwise restrict competition” in violation of the proposed law, including the following:

• agreements with a prospective or current covered individual that establish a fixed term of service (which is understood to allow certain types of “garden leave” agreements)
• agreements prohibiting disclosure of trade secrets, or confidential and proprietary client information
• agreements prohibiting solicitation of clients of the employer that the covered individual learned about during employment

Interestingly, the bill doesn’t appear to include an explicit exclusion of non-competes as part of a sale of business, though a seller may arguably not be a “covered individual,” under the law’s definition, depending on the context of the non-compete agreement.

The bill also does not expressly mention employee non-solicitation agreements. The bill by its own terms, however, does not affect “any other provision of federal, state, or local law, rule, or regulation” concerning agreement enforceability, which suggests that the existing reasonableness test under New York common law would still apply to employee non-solicitation agreements. An agreement by an individual not to solicit other employees of a former employer seems unlikely to “prohibit or restrict” that individual from obtaining new employment, and therefore this legislation should not affect carefully tailored agreements not to solicit employees.

The new law also does not clearly address how it may interact with forfeiture-for-competition agreements, which have traditionally enjoyed little scrutiny under New York’s employee choice doctrine; this is likely an open question that may be addressed by guidance or litigation after the law is passed, though we note that such arrangements have been found to violate California’s non-compete ban.

Remedies

The new law creates a private cause of action for covered individuals. Claimants can bring a civil action in a court of competent jurisdiction. Such actions must be brought within two years of the later of (i) when the allegedly prohibited non-compete agreement was signed; (ii) when the covered individual learns of the allegedly prohibited non-compete agreement; (iii) when the employment or contractual relationship is terminated; or (iv) when the employer takes any step to enforce the non-compete agreement. 

The proposed law would give New York courts jurisdiction to void any such illegal non-compete agreement and to order all appropriate relief, including enjoining the conduct of any person or employer; ordering payment of liquidated damages “to every covered individual affected under this section”; and awarding lost compensation, damages, reasonable attorneys’ fees, and costs. Liquidated damages will be calculated as an amount not more than $10,000.

Retroactivity

The bill’s plain language provides that it applies to contracts “entered into or modified on or after” the effective date of the statute; thus it appears that the question of the bill’s retroactivity should be straightforward and answered in the negative.

Contact Us

Sidley is continuing to monitor this bill. As noted, if signed by the Governor, it will become effective 30 days later. We are available to answer any questions you may have now or once the law is signed and becomes effective. If you have any questions about the pending New York non-compete ban or would like to discuss how this law may apply to your company in particular circumstances, please contact the Sidley lawyer with whom you usually work or a member of our Employment Team.