New York Legislature Considers Revised Non-Compete Ban

Seyfarth Synopsis: Ever since the New York State Legislature passed legislation to prohibit non-compete clauses in employment contracts in June 2023, the bill has languished awaiting Governor Hochul’s signature.  To allay the concerns of a number of constituencies, including the financial services industry, the State Senate is now considering a revised version of the non-compete ban, which exempts certain “highly compensated individuals” and partnership arrangements from its scope. 

As discussed here, here, and here, New York has been poised to join a number of states that prohibit non-compete clauses in employment agreements. In June 2023, the Legislature passed a bill that would have declared an outright ban on such agreements, with no exceptions, but the bill was not formally delivered to the Governor due to well-publicized concerns she would veto it.

On December 12, 2023, the bill was finally delivered to the Governor, triggering a ten-day review period.  Around the same time, a revised bill began circulating in the Legislature to allay concerns from various business groups.  The following is a breakdown of the more controversial portions of the June bill and the relevant changes contained in the revised bill.

Original Bill: All-Encompassing, Broad Definition of Covered Individuals

The June bill defines “non-compete agreements” 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 voids “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.”  Employers cannot “seek, require, demand or accept a non-compete agreement from any covered individual” as the bill currently reads.

Revised Bill: Exemption for “Highly Compensated Individuals,” Partners, and Owners

As a result of sustained opposition to the breadth of the pending bill, which would apply to almost every employee in New York State, State Senators recently began circulating for consideration Senate Bill 3100-A.  The bill still voids “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.”  However, the bill carves out from coverage “highly compensated individuals.”  Such individuals are defined as “any individual who[] is compensated with respect to services and/or exclusivity to the relevant employer or its affiliates at an annualized rate of cash base salary compensation equivalent to or greater than $400,000.00 per year." (Note: there are reports of the Legislature considering lower salary thresholds in order to appease the Governor and business groups.)

The bill further exempts noncompete agreements for “a partner of a partnership (or similarly a member of a limited liability company) in such partner’s (or member's) capacity as a partner or member” or for “for a person or entity, owning fifteen percent or more ownership interest in a business, selling the goodwill of a business or selling or otherwise disposing of a majority of his, her or its ownership interest in a business (or indirectly through such business selling all or substantially all of its assets) in connection with such transaction.”

Revised Bill: Non-Compete Agreements Must Still Meet Certain Conditions for Enforceability; No Choice-of-Law

The revised bill also clarifies that non-compete agreements “must [still] meet all requirements and conditions under the common law of New York that presently exist or that come into existence in the future, including but not limited to: (1) it is reasonable in time, geography, and scope; (2) it does not impose an undue hardship on the employee; (3) it does not harm the public; (4) it is necessary to protect the employer’s legitimate business interests; and (5) its restrictions are no greater than necessary to protect the legitimate business interests of the employer.”

As currently written, the revised bill still prohibits choice of law or choice of venue provisions “that would have the effect of avoiding or limiting the requirements of” the bill so long as the covered individual has been “for at least thirty days immediately preceding the covered individual's cessation of employment, a resident of New York or employed in New York.”

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All of these changes may allay the concerns of various interest groups opposed to the original bill and persuade the Governor to give her approval.  If so, then the presumed sequence of events would be that Governor Hochul vetoes the original bill (either directly or by “pocket veto”), awaits passage of the revised bill by both chambers of the Legislature, and then signs that revised bill, presumably sometime early in the next legislative session, which commences in January 2024.

Seyfarth will continue to monitor and report on the status of this New York State bill.  In the meantime, please feel free to reach out to the authors of this alert, or your favorite Seyfarth attorney, if you have any questions.