New York Governor Kathy Hochul has a bill on her desk awaiting signature that would generally make non-compete agreements for employees not enforceable in New York. The legislation enhances the importance of confidentiality agreements.
In June, the New York state legislature passed a bill, known as S3100-A, that would authorize courts to void any non-compete agreement (as defined in the statute) and allow employees and contractors who suffered damages as a result of an invalid non-compete agreement’s enforcement a right to liquidated damages up to $10,000 or lost wages, actual damages or attorneys’ fees.
We will soon know whether she will sign this legislation.
Californians have often argued that a state boosts its economy by allowing workers to change jobs easily because job-changers take with them the know-how and software skills from the old employer’s workplace to “pollinate” the new workplace. New York could be testing that theory.
First, a contract is void if it restrains “anyone” from “engaging in a lawful profession, trade or business of any kind.”
Second, the legislation forbids anyone from seeking, requiring, demanding, or accepting a non-compete agreement from a “covered individual,” as that term is defined.
The legislation applies to individual humans, defined as “covered individuals” that are “in a position of economic dependence” on the contracting party. This presumably picks up workers who are independent contractors and gig workers, not only W-2 workers.
A non-compete agreement, under the legislation, applies to employment after the “conclusion of employment” with the contracting party. This language presumably allows an employer to restrict a worker during a period of employment.
The legislation states that this text should not be read to affect an employer’s ability to enter into an agreement that “establishes a fixed term of service or that prohibits disclosure of trade secrets, disclosure of confidential and proprietary client information or solicitation of clients of the employer that the covered individual learned about during employment.” This limitation will likely enhance the value of confidentiality agreements more than ever. However, the proviso on that limit is that the confidentiality agreement “does not otherwise restrict competition in violation of this section.”
The act takes effect 30 days after it becomes a law and “shall be applicable to contracts entered into or modified” after the effective date. The legislation does not say how it affects contracts that were previously entered into or how “modified” an affected contract would have to be. There is some legislative history that suggests that the legislature thought the legislation would invalidate existing agreements. The legislation, for example, does not explain how to treat an employment agreement with a non-compete provision that is modified to extend the employment term. Will a judge have the authority to void an entire contract or merely a non-compete covenant after a later date modification?
An unanswered question is whether a court will enforce a non-compete covenant contained in a sale-of-business agreement. California’s law allows that sort of non-compete, but that sort of limitation does not appear in the New York legislation.
Some contracts provide for payments to exiting employees by keeping the employee on the payroll for a period of “garden leave,” for example. Since the definition of “non-compete agreement” in the New York legislation depends upon the words “after the conclusion of employment,” apparently, an arrangement that keeps a departing person on as a W-2 employee for a period would not prevent enforcement of the non-compete clause for the garden-leave period.
Not only the employer entity is prohibited from seeking a non-compete. The group of persons who cannot attempt to seek or obtain a forbidden covenant includes the “employer or its agent, or the officer or agent of any corporation, partnership, limited liability company, or other entity.” That language could mean that if a court orders a payment of monetary damages, there could be personal liability for those who act in concert with the employer.
We will have to wait and see.
Of CounselA transactional lawyer working closely with business clients, Noel Humphreys actively participates in the ins and outs of business organizations. He focuses his practice on business transactions, lending transactions ...