New York State Senate Approves Bills Banning Use of Non-Compete Agreements | Seyfarth Shaw

New York is poised to join the growing number of states enacting legislation to curtail the use of non-compete agreements by employers. On June 7, 2023, the New York State Senate voted to pass Bill No. S3100A, which, if enacted, would ban all post-employment non-compete agreements, along with Bill No. S6748, which is generally aimed at preventing the establishment of monopolies, monopsonies, and restraints of trade by, among other things, curtailing the use of non-compete agreements. The Bills are currently awaiting passage by the New York State Assembly and are expected to be signed by Governor Kathy Hochul.

Key Features of Senate Bill S3100A

  • The Bill proposes to prohibit employers from entering into any non-compete agreement with any worker, employee or independent contractor. First, the Bill states: “Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
  • The Bill then expressly states: “For all covered individuals, no employer or its agent or the officer or agent of any corporation, partnership, limited liability company, or other entity, shall seek require, demand or accept a non-compete agreement from any covered individually.”
  • “Covered individual” is defined to be “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.”
  • An action for violation of the law must be brought within two years of the later of: (1) when the prohibited non-compete was signed; (2) when the individual covered learns of the prohibited non-compete; (3) when the employment or contractual relationship is terminated; or (4) when the employer takes any step to enforce the non-compete.
  • Employers who are found liable for violating the statute would be subject to liquidated damages of up to $10,000, and be required to pay lost compensation, damages, reasonable attorneys’ fees and costs.
  • The law will go into effect 30 days after the bill is passed and operates prospectively.

Key Features of Senate Bill S6748

  • bill no. S6748, entitled the “Twenty-First Century Anti-Trust Act” contains provisions regarding the unfair use of non-compete agreements. Specifically, the proposed legislation expressly provides:

It is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.

  • The Bill defines “non-compete agreement” to mean “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer, ” and to broadly include any “de facto non-compete,” such as:(1) non-disclosure agreements that effectively preclude the worker from working in the same field post-termination; and (2) any term that requires a worker to pay for certain training costs if the worker’s employment terminates within a specified time period.
  • Existing non-compete clauses that fail to comply with the foregoing good faith basis test must be rescinded. Employers must further provide written notice of the rescission to the employee within 45 days.

Takeaways

While Bill S3100A, and to a lesser extent Bill S6748, would ban non-compete agreements between an employer and its employees, what’s less clear is the impact of these Bills on non-compete agreements entered into in connection with the sale of a business or other types of competitive restraints, such as customer and employee non-solicitation agreements. Indeed, a case can be made that the broad language in Bill S3100A that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void” would ban any type of non- compete or non-solicitation restraint. Bill S6748 is also vague in that it does not expound upon or define “good faith basis;” given that the bill’s requirement that an employer accepts existing non-competes that failed to meet the “good faith” test, it is unclear whether Bill S6748 is retroactive as to all non-competes or only applies to non-competes that an employer has reason to know is unenforceable under current law. Arguably, it only requires refusal of non-competes for which the employer had no good faith reason to believe that the covenant was enforceable at the time it was entered into.

If enacted, the new legislation would result in a fundamental and dramatic sweeping change to New York law. Under current New York law, a post-employment restrictive covenant is enforceable so long as the restraint (1) is no greater than is required for the protection of the legitimate interest of the employer (eg, protection of trade secrets); (2) does not impose undue burden on the employee; and (3) is not injurious to the public. See BDO Seidman v. Hirshberg, 93 NY2d 382, ​​388-89 (1999). Given that New York is often the preferred contractual choice of law and forum for many businesses, the new legislation will inevitably have far-reaching consequences that will likely be felt nationwide. We will continue to monitor and report on this legislative development.

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