Earlier this month, the two houses of the New York State Legislature voted to approve a new law that, if signed by the Governor, would implement a virtual ban on non-competition agreements in New York State. Should the Governor sign the bill, the law will go into effect 30 days thereafter and will apply to all non-compete agreements entered into or modified on or after the effective date.

The law precludes a non-competition agreement from being entered into or being requested in virtually all agreements for personal services. A non-competition agreement means any agreement (or clause) that prohibits or restricts an individual from obtaining employment after the conclusion of employment.

There are no carve-outs for highly compensated individuals or other categories, such as part-time workers or independent contractors. The only express limitation is that the relationship be such that the person performing services be in a position of “economic dependence” on the other person. But this is a highly ambiguous concept and is unlikely to create clear lines of permissible use of non-competition agreements.

Notably, there is also no exclusion for non-competition agreements entered into in connection with the purchase or sale of a business. Thus, New York has not followed California, which has adopted such a carve out in its ban on non-competition agreements. Nor has the proposed New York law followed the Federal Trade Commission’s proposed ban on non-competition agreements in the United States (see our client alert on this proposal here), which allows a carve-out for sale of business transactions when the non-competition agreement is applied to owners of at least 25% of the business being sold. There may be some ability to argue that under the New York proposed law, a non-competition clause entered into by a seller who never provided services to a buyer may be enforceable; undoubtedly another area ripe for litigation given the absence of an explicit carve out for such transactions. The failure of legislators to carve out this exception will most likely adversely affect deal values, as the inability to prevent competition by sellers may significantly impact the purchase price in the absence of an enforceable non-compete.

The proposed New York law purports not to be retroactive, in contrast to the FTC proposal which explicitly requires parties to rescind existing non-competition agreements. The proposed New York law provides that all non-competition agreements entered into or modified after the effective date will be void. A renewal of an existing agreement that includes a non-compete following the effective date may be deemed a modification. As a result, a renewal could void an existing, valid non-compete.

The proposed New York law explicitly treats non-solicitation of customer agreements as valid, so long as the agreement does not otherwise restrict competition. Here however the law’s permissive language only relates to customers the individual “learned about” during employment. So a non-solicitation agreement that applies to all customers of the employer may be too broad.

The proposed New York law explicitly preserves the ability to enter into agreements prohibiting the disclosure of confidential information and trade secrets, again so long as the agreement does not otherwise restrain competition. The proposed New York law will permit fixed term employment agreements (presumably needed to avoid the interpretation that a fixed term might be viewed as prohibiting other employment).

As written, it is unclear whether employers can pay employees pursuant to “garden leave” provisions, which, in effect, preclude employees from working during the paid leave period.

Individuals who are subject to agreements the proposed New York law renders void can bring suit within a two year statutory period keyed off of the later of (i) the entering into of the agreement; (ii) when the individual learns of the agreement; (iii) termination of the employment relationship; or (iv) an attempt to enforce the agreement. Liquidated damages of up to $10,000 for an affected individual, as well as lost compensation, damages, reasonable attorneys’ fee and costs may be awarded. A court may also grant injunctive relief to enjoin the wrongful conduct.

New York’s proposed law follows a general trend in the United States to restrict non-competition agreements. In addition to the FTC proposal, in May 2023, the general counsel of the National Labor Relations Board issued a memorandum stating that many non-compete agreements violate federal labor law and cautioned employers about entering into overly broad agreements. As the FTC proposal has not yet been acted on, New York’s law, if adopted, may have a significant effect on the legal landscape.

Planning for the possible adoption of the new law would include a review of existing employment agreements which contain non-competition clauses, particularly those that may renew given the possible interpretation that the renewal may be deemed a modification. Consideration may also be given to writing future agreements to focus only on non-solicitation of customers, as well as protection of confidential information and trade secrets, and to avoid the non-competition aspect altogether, especially given the pending FTC proposal, the NLRB memorandum, as well as the New York proposal.  Employers may also want to separate out non-compete provisions from employment or equity agreements that are likely to be modified, and instead have stand-alone non-competition covenants entered into prior to the effective date of the new law.