On June 20, 2023, the New York State Assembly passed Assembly Bill 1278, which was passed by the New York State Senate earlier this month, prohibiting certain non-compete agreements and restrictive covenants in New York. The bill has been sent to Governor Kathy Hochul for review and signature. If signed into law, it would amend the New York Labor Law to void “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind” and make it unlawful for an employer or its agents to “seek, require, demand or accept a non-compete agreement from any covered individual.” Despite the bill being promoted as a clear rule against non-competes, it contains an abundance of uncertainties that could lead to years of litigation. For that reason, instead of signing the bill, the Governor may return the bill to the legislature to clarify a number of key points.
What exactly does the bill say?
The bill broadly defines “non-compete agreement” 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.” It defines “covered individual” as any “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.” The bill includes few exceptions, which include agreements that prohibit non-disclosure agreements protecting trade secrets and confidential information as well as agreements prohibiting the solicitation of the employer’s clients that the covered individual learned about during their employment. However, those exceptions are then subject to the following limitation, which states, “provided that such agreement does not otherwise restrict competition in violation of this section.”
The bill creates a private right of action for both employees and certain workers who may be treated as independent contractors, allowing them to bring suit against an employer within two years of (i) the date the non-compete was signed; (ii) the date the employee or contractor learns of the non-compete agreement; (iii) the date the employment or the contractual relationship is terminated; or (iv) the date on which the employer takes any step to enforce the non-compete agreement.
Key uncertainties that warrant clarification by the legislature
The following are some of the many issues raised by the legislation:
New York would be the fifth state to bar all or certain non-compete agreements if this bill is signed by the Governor. Other jurisdictions that have non-compete restrictions are more limited and focused upon the overuse of non-competes. If the Governor sends this bill back to the legislature, she should also suggest that the bill provide carve-outs for valid circumstances when non-competes serve overriding business objectives – and not just those involved in the sale of a business.
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