New York Considers Ending Non-Competes for Most New York Employees
Pending legislation (S4641/A01361), which we believe has a good chance of being passed and signed into law by Governor Hochul, would ban non-compete agreements for employees who are not highly compensated or are health-related professionals compensated at any salary level.
The law would apply only to agreements entered into after the law goes into effect. This legislation would represent a fundamental change for New York employers—particularly for New York hospitals, physician groups and other health care provider entities.
What Employers and Employees will be Covered by the Law
Employers: The law applies not only to employees who reside in New York, but also to individuals who are employed in New York or who work remotely outside the state but report to a New York worksite, office, or a New York based supervisor. Accordingly, if enacted in its current form, the legislation likely will act as a catalyst for employers to restructure their business operations to minimize their New York state contacts and avoid the reach of the law when possible.
Employers may wish to move their offices from New York and change their internal management structures to have employees report to out of state supervisors.
Employees: S4641/A01361 applies to a “covered individual,” defined as any person other than a highly compensated individual who, whether or not employed under a contract of employment, performs or has performed 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 would exclude from the definition of a “covered individual” any person making an average of $500,000 or more per year. The law covers any “health related professional,” which includes physicians, registered nurses (RN), physician assistants (PA), and many other licensed specialists.
The Litigation Trap
Critically, the bill makes non-compete clauses unenforceable but also introduces a private right of action. This means an employee could potentially sue an employer for including or attempting to enforce prohibited language.
- The Cost of Non-Compliance: If an employer violates the law, New York courts may void the non-compete agreement and order all appropriate relief, including enjoining the conduct; ordering payment of liquidated damages (up to $10,000); and awarding lost compensation, compensatory damages, reasonable attorneys’ fees and costs to the employee.
- Litigation Liability: Once the legislation is enacted, employers should alter or eliminate any non-compete language in their employment contract templates before using them for new employees. Employers also should expect New York courts to be even more reluctant to enforce any non-compete provisions in their preexisting agreements.
Provisions that Companies May Include in Agreements
While employers may not be able to stop their current or former employees from working for competitors, they can—and should—protect their client or patient base by including other covenants, such as:
- Intellectual Property & Trade Secrets: Patient lists, proprietary billing methodologies, and internal protocols remain protectable assets. Ensure confidentiality agreements are updated and well drafted.
- The Sale-of-Business Exception: Non-competes may still be valid during the sale of an LLC or partnership interest (requiring at least a 15% ownership stake).
- Garden Leave: For those circumstances where the restricted individual is not a highly compensated individual or a health related professional and the covenant complies this applicable common law requirements, garden leave provisions—where an employee is paid to remain away from work during their notice period—can offer a strategic buffer without legally restricting future employment. The non-compete restriction cannot last for more than one year and the employer must continue paying the employee’s salary for the entire time the non-compete is being enforced.
A Proactive Compliance Action Plan
Bleakley Platt & Schmidt’s attorneys can guide you through compliance with a proactive action plan. We recommend that employers of individuals who are not highly compensated or are health related professionals take the following steps before S4641/A01361 becomes law:
- Deconstruct Your Templates: Identify and remove non-compliant non-compete provisions that could trigger the $10,000 penalty under the new private right of action.
- Redefine Reasonableness: Ensure that non-solicitation and confidentiality clauses are properly drafted and narrowly tailored as we believe that these provisions will become more important and face increased judicial scrutiny.
- Restructure Incentives: Replace upfront, unprotected bonuses with retention incentives that reward loyalty and tenure rather than penalizing movement.
- Improve Employment Environment: Redouble efforts to strengthen organizational culture to promote competitive benefits, positive working conditions, “whole person” employee experience, transparent communication, constructive feedback and recognition of positive contributions.
Contact us today to schedule a comprehensive agreement audit with attorneys from our Health Law, Health Care Litigation and Corporate Law practice groups.