New York Set to Enact Total Prohibition on Non-Compete Agreements
New York is set to become the latest state to enact a prohibition on non-compete employment agreements following the passage of bill A1278B/S3100A by the New York State legislature.
If signed into law by NY Governor Hochul, new Labor Law Section 191-d will go into effect thirty (30) days after it becomes law and will prohibit any non-compete agreement entered into or modified thereafter. The new law as currently drafted would not operate retroactively or void current non-compete agreements.
However, employers seeking to enforce current non-compete agreements may run into judicial roadblocks given the state’s newly codified public policy against the use of non-competes. Under current case law precedent, a non-compete is enforceable to the extent it (1) is necessary to protect the employer’s legitimate interests, (2) does not impose an undue hardship on the employee, (3) does not harm the public, and (4) is reasonable in time-period and geographic scope. (BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 388-89 (1999); Reed, Roberts, 40 N.Y.2d at 307; Scott, Stackrow & Co., C.P.A.’s, P.C. v. Skavina, 780 N.Y.S.2d 675 (App. Div. 3d Dept. 2004).) It is highly unlikely that New York courts will uphold existing non-compete provisions after our elected state legislature has determined that non-compete covenants are illegal regardless of how compelling the business interests are and how narrowly tailored in duration and geographic scope the restriction is.
The legislation defines a “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 definition of “covered individual” does not distinguish between a traditional employment relationship and an independent contractor relationship. It covers any 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.”
Section 191-d imposes a total ban on non-compete agreements and provides a private right of action, granting employees and contractors the ability to sue employers who violate the section within two years of (i) the date the prohibited non-compete was signed; (ii) the date the employee or contractor learns of the prohibited non-compete agreement; (iii) the date employment or the contractual relationship is terminated; or (iv) the date the employer takes any step to enforce a non-compete agreement. The bill provides the court with the ability to void the non-compete and order other appropriate relief including awarding the employee/contractor lost compensation, damages, attorney’s fees and costs, and liquidated damages up to $10,000. Because the statute applies to contracts entered into or modified on or after the statute’s effective date, employers can become liable under the statute for old contracts with restrictive covenants that are inadvertently modified even if they do not seek to enforce them. This is a pitfall to avoid.
The term “Non-compete Agreement” is limited to agreements “after the conclusion of employment with the employer included as a party to the Agreement.” Accordingly, the new law would not prohibit the buyer of a business from imposing a non-compete restriction on the seller in a sale agreement between them since that agreement would be with a buyer entity, rather than with an employer entity.
Section 1(5) states that the law shall not be “construed or interpreted as affecting any other provision of [law] relating to the ability of an employer to enter into an agreement with a prospective or current covered individual that establishes a fixed term of service”. While this statutory language is unclear, it seems likely that this provision is intended to permit an employer to enter into a contract for a fixed term even if the agreement includes provisions that require the employee or contractor to work exclusively for the employer during the term and to give his or her best efforts to promote the interests of the employer, which effectively precludes the employee or contractor from working during that time for another employer. The statute also permits agreements that prohibit the disclosure of trade secrets and confidential and proprietary client information and prohibit the solicitation of clients of the employer that the covered individual learned about during employment.
Bleakley Platt & Schmidt, LLP will continue to monitor the developments concerning this pending legislation. For more information and strategies to address the new legislation, please contact Robert Braumuller or Zaina S. Khoury, at RBraumuller@bpslaw.com or ZKhoury@bpslaw.com.