Two competing bills with two very different approaches to post-employment restrictive covenants are being considered by the New York State legislature. One bill would bar non-competes with all employees who make less than $500,000 per year and would impose limitations on non-competes with employees who make more than $500,000 per year. The other bill would allow post-employment restrictions with employees who resign or are terminated for good cause as long as certain notice and related requirements are met.
The bill barring non-competes with workers making less than $500,000 per year (Senate Bill S4641) was introduced by the same state senator who introduced a more draconian non-compete ban that passed the legislature in 2023 but was not signed by Governor Hochul. The new bill seems designed to address some of the governor’s concerns. The key provisions of the new bill include:
- A non-compete agreement is any agreement between an employer and a covered individual that prohibits or restricts the individual from obtaining employment after the conclusion of employment with the current employer. This definition would not encompass non-solicits or confidentiality agreements, and there is also a carve out for a non-compete in connection with the sale of a business.
- No employer shall seek, demand, or accept a non-compete agreement from any covered individual.
- A covered individual is essentially defined as any person — other than a highly compensated individual — who works or performs services for another person or entity.
- A highly compensated individual as “any individual who is compensated at an average annualized rate of cash compensation … equivalent to or greater than five hundred thousand dollars per year.” Cash compensation is “determined by the income listed on the individual’s three most recent W-2 statements and, where applicable, K-1 statements, or all such statements from the duration of the individual’s employment if the term of employment is less than three years.” The $500,000 threshold will be adjusted each year beginning in 2027 based on any increase in the CPI for Urban Consumers for New York State.
- Any non-compete agreement barred by the bill and entered into after the effective date of the bill would be void and unenforceable. The implication is that this would not impact existing non-competes.
- Any non-compete that is permissible under the new bill would need to meet all current New York common law requirements for enforceability, including being reasonable in length, geographic reach and scope and being necessary to protect the legitimate interests of the employer. The bill imposes a new one year maximum on the length of a non-compete.
- Any non-compete that is permissible under the new bill would have to provide for payment of salary to the individual during the period of enforcement of the non-compete.
- The bill creates a private right of action, and an aggrieved individual can seek, among other things, actual damages, liquidated damages of up to $10,000 per person, and attorneys’ fees.
The bill permitting post-employment restrictions (Assembly Bill A01361) would impose a number of new requirements and limitations. Key provisions of this bill include:
- A restrictive covenant is defined as any agreement between an employer and an employee (including a separation or severance agreement) that precludes an employee from engaging in “certain specified activities” in competition with the employer after the employment relationship ends. Since the bill applies to any post-employment competitive activities that are specifically barred in an agreement, it encompasses non-competes as well as client and employee non-solicitation agreements.
- A restrictive covenant is enforceable if it meets several requirements, including:
- A new employee must receive a copy of the agreement on the earlier of the date a formal offer of employment is made or 30 days prior to commencement of employment.
- An existing employee must receive a copy of the agreement at least 30 days before any restriction takes effect.
- The agreement must state that the employee has the right to consult counsel prior to signing.
- The agreement must be no more restrictive than needed to protect the employer’s trade secrets.
- The agreement cannot preclude an employee from providing a service to a client if the employee does not “initiate or solicit” the client.
- The agreement cannot preclude an employee from “working with” others who worked for the employer.
- Restrictive covenants are not enforceable against an employee who is terminated without good cause. The bill provides that good cause for termination may include (but is not limited to) the employee (i) engaging in a pattern of improper behavior, (ii) not working in an efficient manner, working belatedly or negligently or in violation of the standards of quality of the employer, (iii) repeatedly violating reasonable rules or policies, and (iv) committing serious misconduct that has a detrimental effect on the employer’s business.
- Employers must provide their employees with a written document regarding the employer’s “policy on good cause with respect to termination.”
- The bill would apply only to agreements entered into after it becomes effective and would not apply retroactively.
Both bills are likely to be controversial. Both are currently in committee, and it is not clear if either will advance out of committee, will be approved by both houses of the legislature, or will be signed by the governor. We are continuing to monitor these bills.