UPDATE: New York State Set to Prohibit Non-Compete Agreements [VETOED]

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Update: On December 22, 2023, New York State Governor Kathy Hochul vetoed the bill that would ban all new non-competition agreements for workers in New York. News reports indicate that Governor Hochul sought to limit the ban on non-compete agreements to individuals earning up to US$250,000, while sponsors of the bill were ultimately agreeable to a US$300,000 limit, and both sides differed on how bonuses and stock options should be counted for this purpose. See, e.g., Hochul Vetoes Ban on Noncompete Agreements in New York, New York Times (December 22, 2023). Employers should expect a revised bill to be introduced next year.

The New York State Legislature passed a bill on June 30, 2023, that, if signed into law by Governor Kathy Hochul, will prohibit almost all new non-competition agreements for workers. The law will take effect 30 days after the Governor signs it and shall apply to contracts entered into or modified after such effective date. As noted below, the bill's language leaves open certain questions that may need to be resolved through litigation or further action by the New York State Legislature.

Prohibition of Non-Compete Agreements

The bill amends the New York State Labor Law by adding a new Section 191-d to (i) prohibit employers, corporations, partnerships, limited liability companies or other entities from seeking, requiring, demanding or accepting a "non-compete agreement" from any "covered individual" (Section 191-d(2)), and (ii) provide 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 (Section 191-d(3)).

The bill defines "non-compete agreement" 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 law does not explicitly address whether forfeiture for competition or garden leave provisions will be permitted under New York law. It also is not clear whether the language in Section 191-d(3) making void every contract restraining anyone from engaging in a lawful profession, trade or business, is intended to apply to agreements other than "non-compete agreements" with "covered individuals." Since "non-compete agreements" are defined in the bill as those entered into between an employer and a covered individual, the broader use of every contract in Section 191-d(3) could be read to apply to any agreement, including agreements between a buyer and sellers of a business or a partner and a partnership, that includes a non-competition provision or even other restrictive covenants that could be said to restrain engaging in a lawful profession, trade or business.

Exceptions to Prohibition

The bill expressly provides that it does not prohibit an employer from entering into an agreement with a prospective or current covered individual that establishes a fixed term of service or prohibits disclosure of trade secrets, disclosure of confidential and proprietary client information, or solicitation of clients of the employer that the covered individual learned about during employment, provided that such agreement does not otherwise restrict competition in violation of Section 191-d. The bill does not contain any express exception for covered individuals who are sellers of a business and also does not expressly address the treatment of employee non-solicitation provisions.

Private Right of Action

The bill creates a private right of action by a covered individual to sue for violations of Section 191-d and to seek all appropriate relief, including lost compensation, damages and reasonable attorneys' fees and costs, in addition to voiding the prohibited non-compete. The bill also provides that "every" covered individual affected under Section 191-d is entitled to mandatory liquidated damages in an amount not more than US$10,000 in addition to any other remedies permitted under Section 191-d.

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