New York may soon prohibit employers from including non-compete provisions in their employment agreements. Bill A1278B/S3100A was passed by the New York State Legislature on June 20, 2023, but has not been signed by the Governor. We believe that an amended version of the proposed legislation is likely to be passed and become effective in early 2024. If signed into law by Governor Hochul, a new Labor Law Section 191-d would go into effect thirty (30) days later to prohibit any non-compete agreement entered into or modified thereafter.
Although the legislation would not void current non-compete agreements, employers may not be able to enforce them due to the 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 the 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.
As currently worded, 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. Because this exception is not explicitly stated in the bill, however, we hope that it will be clarified in any amendment to the current bill.
Many agreements require the employee or contractor to work exclusively for the employer and to give his or her best efforts to the employer during the term. These types of provisions effectively preclude the employee or contractor from working during that time for another employer. Section 1(5) of the law is likely intended to permit this. 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.
