New York State lawmakers have passed a bill that, if signed into law by Governor Hochul, will ban non-compete agreements and provisions in New York State. This adds to the uncertainty about the future of non-compete agreements created by the pending FTC proposal to ban all non-competes, which has been delayed by the tens of thousands of comments received during the comment period. All of this leaves employers unsure on how to move forward on restrictive covenants.
The New York Bill
The bill, passed by both the State Senate and Assembly, awaits the signature of Governor Kathy Hochul. If signed, the new law will take effect 30 days later.
New Labor Law Section 191-d will not only deem non-compete agreements and provisions void and unenforceable, but it will also ban employers from seeking, requiring, demanding or accepting a non-compete agreement from any covered individual. “Covered individual” is defined 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. This definition focuses on the work performed or services provided, irrespective of a traditional employment relationship or independent contractor relationship.”
Notably, Section 191-d(4) creates a statutory private cause of action, allowing covered individuals to commence legal action against the employer for violations. Covered individuals may sue within two years of (i) when the prohibited non-compete agreement was signed; (ii) when the covered individual learns of the prohibited non-compete agreement; (iii) when the employment or contractual relationship is terminated; or (iv) when the employer takes any step to enforce the non-compete agreement.
Although the bill provides that it will apply to contracts “entered into or modified on or after such effective date,” the ambiguous language of subsection (iv) above might be interpreted to include a claim against an employer attempting to enforce a non-compete entered into prior to the effective date of the law. While subsections (i) and (ii) refer to “the prohibited” non-compete agreement, subsection (iv) only refers to “the” non-compete agreement.
In the lawsuits permitted by Section 191-d(4), the court may order “all appropriate relief, including enjoining the conduct of any person or employer; ordering payment of liquidated damages; and awarding lost compensation, damages, reasonable attorneys’ fees and costs.” Liquidated damages are capped at ten thousand dollars ($10,000). But note that Section 191-d(4)(a) requires the court to award liquidated damages, in an amount up to ten thousand dollars ($10,000), in addition to any other remedies permitted by this section.
Section 191-d(5) carves out and makes clear that, so long as the employer does not restrict competition in violation of this law, an employer is not restricted from entering into an agreement:
- establishing an enforceable fixed term of service,
- prohibiting disclosure of trade secrets,
- prohibiting disclosure of confidential and proprietary client information,
- prohibiting the solicitation of clients of the employer that the covered individual learned about during their employment.
Lastly, this new law will supplant Labor Law §202-k that currently bans non-compete agreements for certain broadcast industry employees. However, if the new law is deemed in the future to be invalid, Section 202-k will still be effective.
What Can Employers Do Now to Protect Their Interests?
There are steps that employers can take to protect their interests and to prepare for whatever regulations and laws are ultimately enacted. As noted by the carveouts in the New York legislation and in the FTC proposed non-compete ban, carefully tailored contracts are permitted to protect trade secrets, confidential and proprietary client information, and certain client lists from being taken or used by a departing employee. Even under current laws allowing non-competes, the scope of all restrictive covenants is the key to enforceability. The more narrowly tailored the agreement, the less vulnerable and more defensible it is.
Employers should identify all of their protectible interests. Work with counsel to understand the steps you can and should take to protect these interests. Counsel can review and analyze the language of all contractual restrictive covenants for scope and enforceability. Counsel can also provide advice on other steps employers and business owners can take to protect their trade secrets and confidential and proprietary information.
The Labor & Employment attorneys at Hurwitz Fine P.C. can help you analyze your needs and help you protect your business interests.
