New York Legislature Agrees to Ban Noncompete Agreements

At a Glance

• New York is poised to become the fifth state to ban employment-related noncompete agreements.
• If Gov. Kathy Hochul signs the bill into law, New York will join California, Oklahoma, North Dakota and Minnesota in banning employers from having employees sign noncompete agreements.

New York is poised to become the fifth state in the nation to impose a complete ban on employment-related noncompete agreements, joining California, Oklahoma, North Dakota, and most recently, Minnesota.

On June 20, 2023, the New York State Assembly passed A1278B, which followed the Senate’s approval of Senate Bill 3100A on June 7, 2023. The bill now goes to Gov. Kathy Hochul, who is expected to sign the bill into law.

In support of the noncompete ban, the New York Legislature expressed their view that noncompete agreements have a “negative effect on the labor market and economy of New York State,” and “prevent workers from seeking employment at entities that may be a better fit” and allow employers to offer less generous wages and benefits “because their workforce cannot seek employment elsewhere.” They specifically called out the prevalence of non-competes in the “medical field” and their view that non-compete agreements “disrupt continuity of care.” In a nod to the Federal Trade Commissions’ recent call to ban non-competes, the New York Legislature explained that this bill “would codify such a ban in state law.” This move also comes on the heels of the National Labor Relations Board’s (NLRB) recent decision in McLaren Macomb, 372 NLRB NO. 58 (Feb. 21, 2023) and subsequent guidance issued by the General Counsel of the NLRB.

New York’s noncompete law is very broad in its scope. It will amend Section 191-d of the New York Labor Code to prohibit any noncompete agreement that restricts any person from obtaining employment after the conclusion of the employment. It applies prospectively to contracts entered into, or modified, on or after the law’s effective date, which will be 30 days after the law is signed by the governor.

The legislature defined a “noncompete agreement” broadly 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.” Thus, in addition to standalone noncompetition agreements, noncompete restrictions within offer letters, employment agreements, stock option agreements and other employment-related agreements, are subject to the law’s prohibition. A “covered individual” includes employees and any independent contractors.

The legislature added some real “teeth” to the law for individuals when employers seek to enforce a noncompete agreement, providing that if an employer seeks, requires, demands or accepts a noncompete agreement from a covered individual, the aggrieved party can bring a civil action within two years from the later of: (i) when the prohibited noncompete agreement was signed; (ii) when the covered individual learns of the prohibited noncompete agreement; (iii) when the employment or contractual relationship is terminated; or (iv) when the employer takes any step to enforce the noncompete agreement. Importantly, the law expressly states that a court can void any such noncompete agreement and order all appropriate relief, including enjoining the employer from taking steps to enforce the noncompete, ordering payment of liquidated damages, and awarding lost compensation, damages, reasonable attorneys’ fees, and costs. Liquidated damages are capped at no more than $10,000. 

There are some exceptions to the complete ban on noncompetes. Nothing in the new law prohibits an employer from securing a nondisclosure of trade secrets and confidential and proprietary client information agreement. Also, the law carves out nonsolicitation of “clients of the employer that the covered individual learned about during employment.” All of these exceptions are conditioned on them not “restricting competition” in violation of this section of the Labor Code. Interestingly, there is no “sale of business” exception, but it seems that a seller can be restricted from competition for a period-of-time following the closing of the sale (as opposed to a period of time following the end of employment, if the seller is employed by the buyer).

What does this mean for employers? This new law will dramatically change the noncompete landscape for employers, employees and independent contractors in New York. New York employers should immediately review their template employment-related agreements to ensure they are compliant in light of the new law. Once the law is enacted, New York employers should consider other means of protecting their trade secrets, customer relationships, and investments in training, such as permissible nondisclosure agreements, nonsolicitation agreements and confidentiality policies.

We will continue to monitor developments on this new ground-breaking legislation in New York, along with the growing list of other states that are significantly curtailing the use of noncompete agreements or are on the precipice of banning noncompetes completely.