New York’s New Approach to Noncompete Agreements
2.1.2024
Governor Hochul has vetoed a proposed law banning noncompete agreements, legislation that had the potential to disrupt years of labor law practice in New York.[1] The law would have covered all individuals – i.e., individuals performing work or services for an organization who are in a position of economic dependence on that organization – and provided them with the right to bring a civil action against their employer. Gov. Hochul indicated that she would support a bill that allows noncompete agreements for high earners.
Though delayed, a seismic shift appears to be in store for 2024. This change did not occur overnight. Instead, it’s riding on a growing wave of distaste for noncompete agreements. Because the change will impact nearly all employers and employees in the state, it’s worth unpacking how the pending law came to be; how other states and the Federal Trade Commission have restricted noncompete agreements; and how the vetoed law would have operated if it were signed.
Background of Assembly Bill A.1278B and Senate Bill S.3100A
A 2019 survey by the Economic Policy Institute and Cornell University estimated that between 27.8% and 46.5% of private-sector workers are subject to noncompete agreements in the United States, and such agreements cover 18.1% of all workers.[2] In New York State, 44.2% of workplaces subject their employees to noncompete agreements.[3]
Not only are noncompete agreements widely used, but the opponents’ chorus has also grown louder recently. Many argue – whether rightly or wrongly – that noncompete agreements negatively affect New York State’s labor market and overall economy because they frustrate, if not outright prohibit, employee mobility.[4] Critics further contend that noncompete agreements limit the pool of qualified job applicants, increasing the burden on employers to hire employees. In addition, they can have a detrimental impact on consumers in certain industries, such as the medical field, where such provisions are commonly used but are thought to disrupt patient care.
On Jan. 13, 2023, Assemblywoman Latoya Joyner, lead sponsor of the bill in the New York State Assembly, introduced Bill A.1278B.[5] New York State Senator Sean Ryan introduced S.3100A on April 13, 2023, in the New York State Senate.[6] The bipartisan bill passed the state Senate on June 7, 2023 and the Assembly on June 20, 2023, respectively. After the Assembly passed the bill, it was referred to the New York State Senate, which failed to deliver the bill to Gov. Hochul for signature. On June 23, 2023, the New York State Assembly speaker issued a press release announcing that the proposed bill would be sent to the governor’s desk “for signature.”[7] Although the governor ultimately rejected the bill, Hochul has indicated that she would support a bill enforcing noncompete agreements for employees earning more than $250,000.[8]
Other Jurisdictions
New York’s proposed law was not created in a vacuum. In the 19th century, North Dakota (1865)[9] and Oklahoma (1890)[10] banned noncompete agreements. Both states were outliers for over a century. However, there has been a recent shift across the United States to restrict the use of noncompete agreements. In fact, on Jan. 5, 2023, the Federal Trade Commission proposed a new rule that would effectively ban the use of noncompete agreements nationwide.[11] The federal government issued the proposed restrictions after some states initiated similar legislative steps to propose tightening restrictions on the use of noncompete agreements. For instance, in 2022, Colorado[12] and Illinois[13] passed legislation limiting noncompete agreements for higher-earning employees. Other states – such as California, Massachusetts, and Washington – have limited the use of noncompete agreements for a few years now. Given that New York has borrowed from its predecessors, it’s worth taking a closer look at some of the nuances in those states.
California
The law proposed in New York’s most closely resembles California’s, which completely prohibits the use of noncompete agreements in employment contracts.[14] In general, California prohibits any contract that restrains an employee from engaging in a lawful profession, trade or business. Moreover, California law prohibits out-of-state employers who operate in California from enforcing noncompete agreements.
Employers can still use narrow contractual provisions to prevent a departing employee from using the employer’s confidential information. However, no covenant is allowed that restricts an employee’s ability to engage in lawful employment within a profession.
Courts in California have interpreted the law governing noncompete agreements very broadly based on the public policy underlying the statute, specifically opposition to the restraint of business and the employee’s right to pursue lawful employment elsewhere. In California, noncompete agreements are void, regardless of whether they are “reasonable.”[15]
Massachusetts
Massachusetts has adopted a more tailored approach. In 2018, Massachusetts enacted the Massachusetts Non-Competition Act, governing the enforceability of noncompete agreements entered on or after Oct. 1, 2018.[16] The act prohibits employers from enforcing noncompete agreements against certain employees, including:
- employees who are classified as non-exempt under the Fair Labor Standards Act (employees who are covered by overtime rules and other provisions of federal and state wage-and-hour laws);
- undergraduate or graduate students participating in an internship or other short-term employment;
- employees terminated without cause or laid off; or
- employees under the age of 18.
Massachusetts also includes other requirements for valid noncompete agreements. For example, it requires agreements to be: in writing, signed by both the employer and employee, and supported by either a “garden leave” clause (i.e., agreements for an employee’s transition period after a notice of termination is given) or some other mutually agreed upon consideration. Additionally, Massachusetts requires employers to provide the proposed noncompete agreement: at or before the time of a formal offer of employment; or 10 business days before the commencement of employment. If an employee has already commenced employment, Massachusetts also prohibits employers from using continued employment as consideration when entering a noncompete agreement. For example, the employer would be required to provide additional pay or benefits as consideration for the new agreement.
Finally, Massachusetts imposes certain time restrictions on the use of noncompete agreements. For example, it establishes that any valid noncompete agreement is only in effect for one year after an employee’s employment ends unless the employee has breached the fiduciary duty owed to the employer or the employee has unlawfully taken the employer’s property. In either event, the noncompete agreement only remains effective for a maximum of two years from the final date of employment.
Washington
In the summer of 2022, the state of Washington adopted a law limiting noncompete agreements. The Washington law focuses on certain income thresholds, prohibiting noncompete agreements for employees and independent contractors earning less than $100,000 annually.[17] In other words, the law makes noncompete agreements per se “void and unenforceable” against employees earning under $100,000 per year. The law also creates an array of requirements for noncompete agreements, including an 18-month presumptive restricted period, advance notice to prospective employees, potential penalties for noncompliance, and other obligations.
The Federal Trade Commission’s Proposed New Rule
The watershed moment for limiting noncompete agreements occurred earlier this year. On Jan. 5, 2023, the Federal Trade Commission proposed a new rule to effectively ban the use of noncompete agreements nationwide.[18] The commission’s proposed rule was issued in response to the Biden administration’s executive order directing the FTC to issue a rule that would limit the enforceability of noncompete agreements.[19]
The 218-page notice describes the FTC’s negative position on noncompete agreements. The notice emphasizes the FTC’s position that noncompete agreements lack value before detailing a new five-part regulation that would effectively eliminate the use of noncompete agreements for all employees, including contractors.
Finally, the proposed rule would also create two requirements for employers using noncompete agreements with their employees. First, employers would need to rescind all existing noncompete restrictions. Second, employers would need to provide individualized notices to their current employees – and restricted former employees – informing them that any noncompete agreement would be ineffective after 45 days.
New York’s New Law
Although the New York State Legislature tried to align itself with California and the Federal Trade Commission rather than adopt the more nuanced approaches of Massachusetts and Washington, it would appear the governor favors a more nuanced approach.
New York’s proposed law would have prevented employers from seeking, requiring, demanding, or accepting a noncompete agreement from any covered individual. A covered individual is broadly defined as anyone who “performs work or services for another person” such that they are economically dependent on or “under an obligation to perform duties for” that other person.[20] Noncompete agreements are defined as any agreement or contractual clause between an employer and a “covered individual” that either “prohibits or restricts [them] from obtaining employment” following their employment with an employer.[21]
Among its provisions is a private right of action for employees, allowing qualifying employees to sue if the employee believes that they were subjected to an unlawful noncompete agreement or clause.[22] Such claims could be filed within two years of the last event enumerated in the vetoed law, specifically,
(1) when the prohibited noncompete agreement was signed
(2) when an employee learned of the noncompete agreement’s existence,
(3) when the employment relationship was terminated, or
(4) when a company tries to enforce a noncompete provision.
Violations of the law would have created penalties of up to $10,000 in damages.
Exceptions
New York’s proposed law also included three exceptions:
First, employers would be permitted to enter into agreements to protect their trade secrets or their confidential/proprietary information from disclosure. This approach intuitively makes sense as trade secret misappropriation is separately protected under New York and federal law.[23]
Second, employers could also execute contracts with an employee for a “fixed term of service.” While the proposed law did not define a “fixed term of service,” it is understood that this exception would cover “garden leave” agreements.[24]
Third, employers could enter into agreements to prevent the solicitation of clients that developed a relationship with the departing employee during their employment as long as competition is not restricted.[25]
Timing
The proposed law would have taken effect 30 days after signature, without retroactive application. The proposed law provided that “[t]his Act . . . shall be applicable to contracts entered into or modified on or after the effective date,” which the bill sets as 30 days after it becomes law.[26] As a result, the proposed law would have applied to noncompete agreements “entered into or modified” after the effective date.
Consequences
The proposed law represents a watershed moment for New York labor law. Although rejected by the governor, there is support for a complete ban on noncompete agreements for employees earning less than $250,000 annually. If such a law was enacted, and the framework remained the same, the law would eliminate noncompete agreements while providing employees with a private right of action for enforcement.
Still, questions remain, namely:
- Why does New York’s proposed law not provide an exception when a person is involved in the sale of a business? By contrast, both California’s existing law and the Federal Trade Commission’s proposed rule explicitly recognize an exception to noncompete agreements in connection with the sale of a business.
- Are employee non-solicitation agreements covered? The proposed law does not expressly mention employee non-solicitation agreements. Whether such agreements are still enforceable or whether they “prohibit or restrict” employees from obtaining new employment will be a question for the courts to decide.
- Because enforceable noncompete agreements may be valid in a company’s place of business outside of New York, what is the effect of the proposed law on out-of-state employers with employees in New York? How is this issue compounded in the age of hybrid and remote work, when employees may have relocated to different parts of New York State and/or other states?
- Most important, will Gov. Hochul sign a law that is the same in substance, but preserves noncompete agreements for high earners?
If the New York Legislature passes a bill during the next legislative session, it would be delivered to the governor’s desk. Gov. Hochul will then have 10 days to sign the bill into law, veto the bill, or do nothing (in which case the bill becomes law without the governor’s signature). If a bill is passed in a special session, like the former bill, it would then be subject to a different process. The governor would have 30 days to act after delivery of the bill to sign it into law, veto it, or do nothing (i.e., a pocket veto). As a third option, the governor could propose any number of chapter amendments to the proposed law: a three-way agreement between the governor, the New York State Assembly and the New York State Senate to make additional 11th-hour changes to the bill. Chapter amendments usually result in passage of the law during the following legislative session. It is unclear why the governor did not propose a chapter amendment here.
Based on the votes cast during passage, it is unclear whether the New York Legislature has enough votes to override Gov. Hochul’s veto. Although Gov. Hochul had promised to propose legislation in 2022 to eliminate noncompete agreements for workers earning below New York’s median wage and to ban “no-poach” agreements under state antitrust law, the proposed bill exceeds Gov.Hochul’s earlier proposals, which might explain why Gov. Hochul is willing to sign a bill with the stipulation that it only applies to employees earning under $250,000.[27]
A version of this article originally appeared in NYLitigator, a publication of the Commercial and Federal Litigation Section of NYSBA (2023, vol. 28, no. 2). It was updated to reflect the governor’s rejection of the bill.
For more information about the Commercial and Federal Litigation Section, see NYSBA.ORG/COMFED.
Paul F. Downs, counsel at Nixon Peabody, is an experienced trial lawyer who represents entities and individuals in complex disputes involving commercial, trade secret, real estate, employment and contractual issues. He has particular experience representing clients in the renewable energy, banking and finance, life sciences (biotech and pharmaceutical), real estate and technology industries.
Vincent Nguyen is a department attorney in Nixon Peabody’s complex commercial disputes practice group. Prior to joining the firm, he served as a law clerk in the New York County Supreme Court.
[1] Maysoon Khan, New York Governo Vetoes Bill That Would Ban Noncompete Agreements, AP News, Dec. 23, 2023, https://apnews.com/article/noncompete-agreement-bill-veto-new-york-61e53ad13f41f1da574740438ee34e63.
[2] Alexander J.S. Colvin & Heidi Shierholz, Noncompete Agreements: Ubiquitous, Harmful to Wages and to Competition, and Part of a Growing Trend of Employers Requiring Workers To Sign Away Their Rights, Economic Policy Institute, Dec. 10, 2019.
[3] Id. at 6.
[4] Impacts of noncompete agreements on the labor market and economic development, and possible legislative solutions: Senate Standing Committees on Commerce, Economic Development and Small Business & Labor (N.Y. 2023) (statement of Sen. Sean M. Ryan, Chair of the Senate Committee on Commerce, Economic Development and Small Business).
[5] Noncompete Prohibition Act of 2023, Assembly Bill A. 1278B.
[6] Senate Bill S. 3100-A.
[7] Press Release: Assembly Passes Legislation Banning Noncompete Agreements in New York, New York Assembly, June 23, 2023.
[8] Luis Ferré-Sadurni, Hochul Vetoes Ban on Noncompete Agreements in New York, N.Y. Times, Dec. 22, 2023, https://www.nytimes.com/2023/12/22/nyregion/kathy-hochul-veto-noncompete.html.
[9] North Dakota Century Code § 9-08-06.
[10] Okla. Stat. tit. 15, § 219(B).
[11] 88 FR 3482-01, 2023 WL 255956 (F.R.).
[12] HB 22-1317.
[13] 820 ILCS 90/1.
[14] Cal. Bus. & Prof. Code § 16600 (prohibiting the use of noncompetes in employment contracts).
[15] Press Release: Attorney General Bonta Reminds Employers and Workers That Noncompete Agreements Are Not Enforceable Under California Law, California Attorney General, Mar. 15, 2022; accord Ixchel Pharma, LLC v. Biogen, Inc., 9 Cal. 5th 1130, 1151 (Cal. 2020) (“our case law has generally invalidated agreements not to compete upon the termination of employment . . . without inquiring into their reasonableness[.]”).
[16] Mass. Gen. Laws ch. 149, § 24L.
[17] RCW 49.62.
[18] 88 FR 3482-01, 2023 WL 255956 (F.R.).
[19] Executive Order on “Promoting Competition in the American Economy.” Exec. Order No. 14036, 86 FR 36987, 2021 WL 2942330 (Pres.).
[20] Senate Bill S. 3100-A, 191-d § 1(1)(b).
[21] Senate Bill S. 3100-A, 191-d § 1(1)(a).
[22] Senate Bill S. 3100-A, 191-d § 1(4)(a).
[23] Senate Bill S. 3100-A, 191-d § 1(5).
[24] Id.
[25] Id.
[26] Senate Bill S. 3100-A, 191-d § 3.
[27] 2022 State of the State, Governor Kathy Hochul, A New Era for New York (Jan. 2022).
