Will New York Be the Next State to Ban Non-Competes?

The drumbeat of opposition to non-compete agreements is getting even louder, as New York is now poised to enact a law that, if passed, would create sweeping prohibitions against non-competes in that state. This continues a trend in which the Federal Trade Commission (“FTC”) announced a proposed rule to ban non-competes at the federal level, and several states have implemented recent legislation that limit who can be subject to a non-compete and/or introduce requirements in order for a non-compete to be enforceable.

As of June 20, 2023, the New York State Assembly and Senate have approved a bill that, if signed by Governor Hochul, would prohibit employers from entering into post-employment non-competition agreements. The proposed law voids contractual clauses “by which anyone is restrained from engaging in a lawful profession, trade, or business,” and provides that “no employer . . . shall seek, require, demand or accept a non-compete agreement from a covered individual.” “Non-compete agreements” at issue include any agreement with an employer “that prohibits or restricts [a] covered individual from obtaining employment, after the conclusion of employment with the employer . . . .” “Covered individuals” include not just employees, but also workers who are “in a position of economic dependence on, and under an obligation to perform duties for,” the party seeking a non-compete.

Unlike several other states’ recent non-compete statutes, the proposed law does not include an income threshold and would apply to all employees, whether an executive or summer intern.

The bill also creates a new private cause of action in which “covered individuals” may bring claims seeking to void non-competes and receive relief that could include liquidated damages of up to $10,000, lost compensation, damages, and reasonable attorneys’ fees.

The law includes a carve-out allowing for contracts for a “fixed term of service” and provides that clauses prohibiting the disclosure of trade secrets or confidential information remain permissible. Non-solicitation clauses prohibiting the “solicitation of clients of the employer that the covered individual learned about during employment” are also allowed, “provided that such agreement does not otherwise restrict competition in violation [of the proposed statute].”

The proposed law is brief, and it invites some questions. For instance, are “forfeiture for competition” clauses still permissible under New York law? What is the impact of the law, if any, on sale-of-business non-competes or employee and contractor non-solicit restrictions? Which independent contractors are “in a position of economic dependence,” and thus subject to the prohibition? Unlike some states’ laws, the bill does not include choice-of-law or dispute resolution requirements, thereby raising additional questions about whether parties can contract around the laws’ requirements in certain instances.

If passed into law, the new statute would not be retroactive, and it would become effective 30 days after Governor’s approval.

As we wait to see whether that approval is forthcoming, employers with a presence in New York, or with agreements governed by New York law, should evaluate their restrictive covenant regime and consider how the new law, if passed, will affect their employee agreements.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.