A comprehensive bill that would effectively ban all new non-compete agreements (and potentially affect provisions and agreements that act as a in fact uncompetitive) for all employees, regardless of salary or income level, is headed to New York Governor Kathy Hochul’s desk.
The New York State Senate passed Bill No. S3100A on June 7 and the New York State Assembly passed its counterpart Bill No. A1278B on June 20, 2023 (the “Bill”). If signed by the Governor, New York Labor Law would be amended to prohibit any non-compete agreement entered into or modified after the effective date of the bill. Advance proposed legislation going through the legislative process which, if enacted, would make such prohibition retroactive to existing non-compete agreements.
These developments follow in the footsteps of similar laws already in place in several states (California, Minnesota, North Dakota and Oklahoma) and similar federal attacks on non-competitors through the prohibition proposed by the Federal Trade Commission (FTC) and General Counsel of the recent memorandum of the National Labor Relations Board.
The acquaintances-acquaintances: a broad definition of non-competitors
The Bill defines a “non-compete agreement” as “any agreement, or provision contained in any agreement, between an employer and a covered individual that prohibits or restricts such covered individual from obtaining employment, upon completion of employment with the employer included as a part of the agreement”.
Notably, the Bill explicitly makes an exception for an agreement that “sets out a fixed term of service or prohibits the disclosure of trade secrets, disclosure of confidential and proprietary client information, or solicitation of employer clients that the covered individual is aware of during employment, provided that such agreement does not restrict competition”. The bill further states that it does not affect “any other provision of federal, state, or local law, rule, or regulation.” As such, it appears that the current reasonableness test under New York common law would still apply to restrictive clauses excluded from the bill’s coverage. In other words, confidentiality agreements and client non-solicitation agreements would still apply if they were reasonable in time and area, necessary to protect the legitimate interests of the employer, not harmful to the general public, and not too burdensome for the employee.
The known-unknowns: what the bill is silent about
Unfortunately, the bill is silent on whether or not it applies to employee non-solicitation agreements. The bill also does not contain an exception for non-compete agreements signed in connection with the sale of a business. And while the definition and scope are broad and comprehensive, it is unclear whether the bill’s prohibitions would extend to retention, equity or forfeiture provisions that may or may not be linked to post-employment competitive activity.
As described below, the Bill is intended to apply only to contracts entered into or modified after its effective date. However, other provisions make clear the impact the bill has on non-compete agreements entered into prior to its effective date. The bill states elsewhere that “(e) every contract by which anyone is prevented from engaging in a lawful profession, trade or business of any kind is void” and allows for a civil action to be brought after an employer any step to enforce the “non-compete agreement”.
The Private Right of Action
The Bill provides covered workers with a private right of action to bring a civil action against an employer who “seeks(s), requires(s), demands or accepts a non-competition from any covered individual” . This civil action must be filed within two years from the date (i) of the signature of the prohibited non-competition; (ii) the employee or contractor becomes aware of the prohibited non-compete agreement; (iii) termination of employment or contractual relationship; or (iv) the employer takes any action to enforce the non-compete agreement.
Effective Date and Impact on Existing Provisions
The Bill establishes that it will come into effect 30 (thirty) days after its enactment and will only apply to contracts entered into or modified from the effective date.
As the legislature is out of session, Gov. Hochul will have 30 days to sign or veto the bill after it is delivered to her. The time it takes for a bill to be delivered to the governor is highly variable. Typically, the legislature waits for the governor to request the bill before handing it over. This can lead to significant delays. For example, during the 2019 legislative session, bills took an average of 114 days to be delivered to then-Governor Andrew Cuomo. In the past, interest groups have used this time to mobilize lobbying efforts to oppose or seek material modifications to bills. If the bill is not signed by the end of this calendar year, it will automatically be reintroduced at the beginning of the next calendar year.
Governor Hochul has not publicly indicated her position on this specific bill. However, based on her stated support for banning non-competitive deals for low-wage workers on the State’s 2022 agenda, it seems likely that she will support this bill, which passed both chambers of the legislature with majorities. significant.
If the governor does not act within those 30 days, the bill will not become law. The omission (pocket veto) will have the same effect as an affirmative veto.
Other changes on the horizon
In addition to S3100A/A1278, the New York State Senate recently passed Bill No. S6748, which would potentially bring more restrictions on non-compete agreements. S6748 contains language identical to the FTC’s proposed rule prohibiting most non-compete agreements stating:
“It is an unfair competitive method for an employer to enter into or attempt to enter into a non-compete clause with an employee; maintain a non-competition clause with the worker; or represent to a worker that the worker is subject to a non-compete clause when the employer has no good faith basis to believe that the worker is subject to an applicable non-compete clause.”
S6748 would also prohibit any contractual term that “has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after completion of the worker’s contract of employment”, which goes far beyond the bill’s provisions. .
Furthermore, unlike the bill, S6748 would be explicitly retroactive, requiring employers to terminate existing non-competes and notify covered individuals that their non-compete agreements are void.
Before S6748 can become law, it must pass the New York State Assembly and be signed into law by Governor Hochul.
Employers in New York State should consult with an experienced attorney to determine the impact these bills will have on their workforce and make plans.
Additionally, employers must:
- Immediately undertake a holistic review of all plans and provisions that potentially fall within the scope of the law to determine the impact of Bill and S6748 on its applicability. This would include:
- Offer Letters, IP/Non-Disclosure Agreements, Termination Plans, Deferred and Equity Compensation Plans, Retention Agreements, Non-Solicitity Agreements, Non-Disclosure Agreements, etc.
- Be prepared to review/repeal/amend such provisions if/when the bill and/or S6784 takes effect.
- Identify and triage key personnel who are currently bound by non-compete provisions and other post-employment obligations, and engage in workforce contingency planning to mitigate potential flight risk.
- Explore alternative and advanced avenues of information retention and protection that withstand the scrutiny of the bill and S6748.
- For employers across states and across the country, assess how the changing landscape affects your approach to post-employment restrictions from an institutional and cultural perspective.