A Closer Look at New York State’s Proposed Ban of Non-Compete Agreements

Non-compete agreements may soon be a thing of the past in New York. Following the passage by the New York State Senate of S3100A, the State Assembly passed A1278B, and if signed into law, it would add new Section 191-d into the New York Labor Law just 30 days later. In short, the proposed law would ban employers from entering into new agreements prohibiting or restricting “covered individuals” from obtaining employment “after the conclusion of employment.” Any attempt by an employer to enforce such a restriction would also provide covered individuals with a private right of action against the employer (and likely others). Notably, the bill only applies prospectively to new agreements or pre-existing agreements that are later modified. While the bill makes clear that newly entered into post-employment non-compete agreements will now be unlawful, it fails to address numerous other related issues. We discuss this bill, questions left open, and its sweeping implications below.

Brief Summary of the Bill

The Bill Appears to Capture Most Agreements Containing Non-Competition Provisions Entered into Between Employers and Their Service Providers.

The bill defines a “non-compete agreement” broadly 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 employment with the employer included as a party to the agreement.”

The bill defines a “covered individual” as “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.”

The Bill Would Void Non-Compete Agreements and Otherwise Prohibit Employers From Entering Into Them with Covered Individuals.

The bill voids “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind,” but this is subject to certain exceptions, which we discuss further below.

The bill prohibits employers, their agents, or officers or agents of any corporation, partnership, limited liability company, or other entity, from seeking, requiring, demanding or accepting a non-compete agreement from any covered individual. (This legislative text appears twice in two separate sections.)

The Bill Contains Very Few Explicit Exceptions.

The bill does carve-out a narrow set of exceptions, including:

The bill, however, explicitly conditions the legality of these exceptions on such agreements and/or provisions “not otherwise restrict[ing] competition in violation of this section.”

The Bill Creates a Private Right of Action for Aggrieved Covered Individuals.

The bill confers a private right of action for covered individuals against any employer or business alleged to have violated its provisions. Covered individuals must file suit within two years of the later of: (i) when the prohibited non-compete agreement was signed; (ii) when the covered individual learns that the prohibited non-compete was signed; (iii) when the employment or contractual relationship is terminated; or (iv) when the employer takes any step to enforce the non-compete agreement.

The bill provides the reviewing court with discretion to void any such non-compete agreement, and award “all appropriate relief,” including injunctive relief, liquidated damages, lost compensation, damages, and reasonable attorneys’ fees and costs. While the bill caps liquidated damages at $10,000, it nonetheless appears to provide for automatic liquidation, noting that the court “shall award liquidated damages to every covered individual affected under this section,” in addition to any other remedies permitted by the bill. Presumably, the failure to file suit would not affect the unenforceability of any such prohibited agreements.

The Bill Goes into Effect 30 Days After it is Signed and Does Not Appear to Apply Retroactively.

More specifically, the bill provides that “[t]his Act . . . shall be applicable to contracts entered into or modified on or after the effective date,” which the bill sets as 30 days after it becomes law. As of this writing, the bill has not formally been sent to Governor Hochul’s desk for a 10-day consideration period, although the Assembly Speaker issued a press release today (June 23) indicating that it will be headed to the Governor’s desk “for signature.”

The Bill Raises Myriad Questions About the Enforceability of Certain Types of Non-Competes and Leaves Many Other Issues Unaddressed.

The passage of this bill is reminiscent of New York’s passage of its own WARN Act where, despite the legislature’s intention to add employer WARN notice obligations, various drafting errors and ambiguous language ended up frustrating even the most well-intentioned employers’ efforts at compliance. But in the case of the New York WARN Act, the law empowered the New York State Department of Labor Commissioner to issue regulations interpreting the law, which it did on an emergency basis to help clarify the confusion (and further regulatory updates followed thereafter). This proposed bill, unfortunately, does not extend the same power to the Commissioner of Labor. Employers and stakeholders will instead have to look elsewhere for clarity, including to:

  1. Governor Hochul to signal to the legislature that she will not sign the bill as drafted. This would put the onus on the legislature to reconsider the legislative text and make appropriate amendments that would avoid a veto. While Governor Hochul has signaled her support for non-compete legislature to protect lower wage workers, as of this writing she has not shared her views on a broader ban.
  2. The judiciary to issue decisions and/or opinions interpreting and outlining the contours of the bill, on which employers may rely to understand how it operates in practice.
  3. The New York State Department of Labor to issue interpretative guidance. Although non-binding, such guidance would also signal to employers and the judiciary how the Department views the reach of the bill.

Until then, employers will be grappling with the following:

  1. Would the proposed law really apply retroactively? While the bill explicitly says in the final section that it applies to contracts entered into or modified after the effective date, the bill’s Sponsor Memo noted that the bill “[v]oids current non-compete agreements . . . ” (emphasis added) and the language proposed to be added as NYLL §191-d(3) says that “every contract” is “void.” For now, we expect the proposed bill means what it plainly says, and thus would not operate to void existing non-compete agreements or prevent employers from enforcing such agreements. But employers should be mindful that, in practice, their enforcement efforts may run up against a judge who may already be weary of non-competes and who now can point to New York’s statutorily-based public policy against non-competes.
  2. Even if the proposed law would apply retroactively, what does a “modified” contract mean? The bill does not distinguish between modified non-compete provisions and modified contracts more generally. Thus, if an employer and employee modify an employment or related agreement containing one of these provisions (e.g. extending an employment term), will that void the non-compete provision that had been in place before the effective date of the statute?
  3. Does the bill empower judges to void an entire contract or just the non-compete provision? The bill explicitly provides 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” and further affords a reviewing court the ability to “void any such non-compete agreement.” As drafted, it is possible that a service provider could seek an order voiding the entire agreement in which the non-compete prohibition resides, even where an agreement contains a severability clause.
  4. Do covered individuals include non-employee service providers? While the definition of “non-compete agreement” utilizes employer and employment terminology, the definition of “covered individual” covers any “person” performing “work or services” for another “person.” (We note that the definition actually uses the phrase “other person,” but the use of the word “other” appears to be a drafting error.) So while this definition would appear to capture independent contractors, freelancers and other non-employee service providers, the definition does come with a limitation: the service provider must perform that work or those services “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 precise contours of this limiting language – including with respect to “economic dependence” – remains to be seen.
  5. How narrow are the already limited exceptions?While the bill does not preclude employers from utilizing a non-disclosure provision or customer/client non-solicitation provisions, that same carve-out section expressly provides that these provisions cannot “otherwise restrict competition in violation of this section.” How will courts interpret this limitation? Will courts continue to rely on the reasonableness test or will they fashion some other less or more forgiving standard? Further, the bill does not wholesale carve out customer non-solicitation provisions – it notes that it only extends to those customers/clients “the covered individual learned about during employment.” Here, again, we are presented with another concept that is open to interpretation.
  6. Is there really no sale of business exception? That’s right – the bill contains no such carve-out for non-competes in the sale-of-business context. Even California’s law and the FTC’s proposed rule (as discussed below) include a sale-of-business exception. This omission has left many scratching their heads and rightfully concerned. As employers and business owners know well, non-competes that prohibit the seller of a business from competing with the buyer are often included in transaction agreements. It remains an open question whether a sale-of-business non-compete agreement or provision where the buyer does not continue to employ a selling shareholder would be covered by the bill. Depending on whether such a provision would be covered may result in tax consequences if one cannot enter into a non-compete when transferring goodwill. However, if the proposed law remains devoid of any such explicit exception or remains otherwise ambiguous on this point, businesses may need to look elsewhere to address this significant shortfall.
  7. Can I pay my employees not to compete? The bill is silent on whether employers can utilize paid notice periods (where the employer pays the employee to continue to perform services, including to help wind down the relationship) or garden leaves (where the employer continues to employ the individual but pays them to sit on the sidelines), or forfeiture for competition provisions (e.g., where a business uses equity awards or other compensation to restrict an employee’s service on behalf of a competitor, and where the employee has the option to either compete or forfeit the promised equity/compensation). With respect to notice periods and garden leaves, the definition of “non-compete agreement” only appears to apply to agreements containing restrictions impacting the covered individual after the employment relationship ends, and thus, a notice period or garden leave could fall outside this prohibition because they are operative during the employment relationship. Further, a related question is whether the bill affects forfeiture provisions or repurchase rights. Many deferred compensation plans or equity incentive programs condition payment or continued vesting on compliance with post-employment non-competes. Similarly, many shareholder and/or operating agreements contain repurchase options regarding a departing employee’s equity, the price of which is determined by compliance with post-employment non-competes. As drafted, the proposed bill provides little guidance as to whether those type of provisions would be rendered unenforceable.
  8. Can I prevent my employees from soliciting their co-workers? Courts have generally been more receptive to enforcement of employee non-solicits because they do not preclude the contracted-with employee from obtaining employment elsewhere. The bill, however, is silent on this issue – it does not prohibit these covenants, but it also does not include them in its exceptions provision. While it appears that employers may still use these covenants for now, employers should be instructed by the bill’s conditional nature of its other exceptions – that their legality depends on the exception not restricting competition in violation of the bill, and thus, they should otherwise tailor employee non-solicits in a manner that would allow for enforcement under New York’s reasonableness test. Further, employers should keep a close eye on court decisions interpreting these types of covenants under this proposed law. Finally, employers should avoid entering into certain types of no-poaching arrangements that could raise anti-trust concerns.
  9. Can individuals be held personally liable? It is also unclear, but it is certainly possible as the bill states that a covered individual can assert a claim against “any employer or persons alleged to have violated,” and further the bill prohibits an “employer” but also “its agents, or the officer or agent of any” corporate entity from seeking, requiring, demand or accepting a non-compete agreement.
  10. Can I just use a different choice of law or venue provision? The bill is silent as to any requirements governing choice-of-law or choice-of-forum provisions in covered non-compete agreements. Employers should consider the facts and circumstances of the relationship to determine whether a contractual provision using another state’s venue and choice of law is appropriate, but understand that court will run its own analysis in deciding whether to enforce these provisions – yet another example where employers will need to look to the courts to address this issue over time.

Takeaways and Parting Thoughts for Employers

As presently written, this bill—if signed into law—would be one of the most restrictive pieces of legislation governing non-compete agreements in the country. This includes California’s law banning non-competes which, while similarly broad, contains exceptions in the “sale-of-business” context—explicitly carving out non-competes entered into in the context of a sale of a business (or its goodwill), as well as in the context of a partner dissolving or withdrawing from a partnership, or when disposing of all shares in a corporation. The New York bill is also broader than the Federal Trade Commission’s proposed rule banning non-competes (which we wrote about here), and which permits non-competes when a “substantial” individual (i.e., a holder of at least 25% of a business) sells the business or its assets.

More broadly, this represents a continuation of the spate of legislative and administrative actions in 2023 restricting and/or limiting the use of non-competes nationwide. This includes not only the FTC’s proposed rule referenced in the prior paragraph (which is not yet a final rule), but also a recent opinion issued by the General Counsel for the National Labor Relations Board, which concluded that non-compete agreements interfere with non-supervisory employees’ Section 7 rights under the National Labor Relations Act, potentially teeing up this issue for the NLRB to address in a future case. Moreover, a bipartisan group of U.S. Senators recently reintroduced the Workforce Mobility Act of 2023, which would codify non-competes as an unfair trade practice and significantly curtail their use by employers (with limited exceptions, including in the sale of a business), and various states have passed laws limiting the use of non-competes, including Minnesota most recently.

And this is not even the only current bill in New York State that addresses non-competes—the New York State Senate passed S6748 on June 7, 2023 (the same day it passed this bill), which is aimed at curbing monopolies, monopsonies, and other restraints on trade and would classify non-competes as unfair restraints on trade. While S6748 is not quite as sweeping a prohibition as this bill (and there is some confusion surrounding what types of non-competes would be permissible), this other proposal would be retroactive to existing non-competes, and would require employers to rescind existing non-compete clauses prohibited by the legislation. S6748 has not yet passed the New York State Assembly (let alone made its way to Governor Hochul’s desk for signature), and we will continue monitoring this legislation which would also significantly impact the non-compete landscape for New York employers.

If signed into law, employers will need to give careful consideration to their continued use of restrictive covenants of all types—not just non-compete provisions. Among other immediate considerations, employers will:

(i) need to review and reshape their template agreements’ covenants on a going forward basis;

(ii) assess the compensation and equity-based impact the loss of this covenant will have, including in the transactional context; and

(iii) analyze the effects that a two-tiered covenant system might have on their workforce (i.e., current workers having existing, valid non-competes while workers joining after the proposed law’s effective date are not bound by such covenants).

These are but a few of the many considerations employers and other relevant stakeholders should keep in mind as we continue to analyze the contours and impact of this bill more closely.

Mintz’s Employment, Labor & Benefits group will continue monitoring this bill and any other legislative developments, and is, as always, here to assist employers with any compliance issues and obligations.