On June 20, the New York State Assembly passed Bill A1278B, which, together with New York State Senate’s passage of identical legislation, Bill 3100A earlier this month, would render all non-compete agreements signed or modified after the effective date unlawful. All that stands in the way of these bills becoming law is Governor Kathy Hochul’s signature.
Definitions
The proposed legislation 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.”
“Covered individual” means “any other 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.” This language extends the bar to non-compete agreements with independent contractors.
Prohibitions
According to the bills, “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Further, 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 noncompete agreement from any covered individual.” Not only does the law bar such clauses, but requesting that a covered individual agree to one would also violate the law.
Exceptions
It should be noted that the legislation does not cover certain other types of restrictive covenants, so long as the agreements do not “otherwise restrict competition,” which is sufficiently vague to prompt litigation over what this exactly means.
The bills do not prevent employers from entering into (1) agreements with a prospective or current covered individual that establishes a fixed term of service; (2) agreements prohibiting disclosure of trade secrets, of confidential and proprietary client information; or (3) agreements prohibiting solicitation of clients of the employer that the covered individual learned about during employment. Again, these agreements would not be barred provided that they would not effectively restrict competition.
Right of Action
If signed into law, the proposed legislation would create a private right of action for employees and contractors, allowing them to sue an employer within two years of (i) the signing of the non-compete; (ii) the date the employee or contractor learns of the non-compete agreement; (iii) the date employment or the contractual relationship is terminated; or (iv) the date the employer takes any step to enforce the non-compete agreement.
The court may void any such non-compete agreement and order all appropriate relief, including injunctive relief, damages for lost compensation, attorney’s fees and costs, and liquidated damages up to $10,000.
This law signals a profound change to New York, which would be among a handful of states barring non-compete agreements. The labor and employment attorneys at Murtha Cullina will monitor the status of this pending litigation and report updates as we receive them.