Governor Hochul Vetoes Proposed New York Law Banning Use of Non-Compete Agreements

Governor Hochul has vetoed legislation that would have imposed a ban on the use of non-compete agreements in the State of New York.  The New York legislation outlawing restrictive covenants was passed by the Legislature on June 20, 2023, and vetoed by the Governor on December 22, 2023.  The legislation would have prohibited employers from requiring or entering into non-compete agreements with employees, and provided for liquidated damages of up to $10,000.  There was no exception for persons selling a business, who would have been free to then compete against the buyer of that business.  The new proposed law would not, however, have otherwise prohibited non-solicitation or trade secret agreements.

The Governor had attempted to reach a compromise in which the law would not apply to employees making $250,000, or more, annually, in the belief the legitimate business interests of employers shifted the balance in those situations.  The compromise was not achieved, resulting in the veto.

Meanwhile, the Federal Trade Commission (“FTC”) previously proposed a new rule that would also ban employers from entering into non-compete agreements with their employees.  The FTC estimates that 30 million persons, or about 20 percent of the United States workforce, are restrained by non-compete clauses with their current employers.  In addition to outlawing non-competes from being entered into after the proposed rule goes into effect, the FTC rule would require an employer to rescind any existing non-compete entered into prior to the compliance date to be set in the rule.  The FTC rule has an exception for a person who is selling a business entity, or substantially all of the assets of a business.  There, a non-compete would be enforceable in order to protect the goodwill paid for and acquired by the purchaser.

The FTC earlier stated in a release that it believes the non-compete clauses are anticompetitive in that they prevent workers from changing jobs and also decrease competition for workers, thus lowering wages for both workers who are subject to the non-compete, as well as those who are not.  The FTC also estimates that its proposed rule would increase American workers’ earnings between $250 billion and $296 billion per year.

Employers who are opposed to the proposed bans against non-competes argue that such restrictive covenants permit the employer to invest in expensive training of employees and protect sensitive confidential information from being transmitted to competitors.  Recently, however, the use of non-competes has trickled down from technology and financial companies to lower level employees across a broad range of businesses, thus limiting their ability to change jobs.

Restrictive covenants or non-competes are not always enforceable under New York law in any event.  Under current New York caselaw, a non-compete must be reasonable in time and geographic scope, necessary to protect the employer’s legitimate interests, not harmful to the general public, and not unreasonably burdensome to the employee.  For example, if a supermarket required its baggers to sign a non-compete, and agree not to work for a different supermarket chain, the supermarket would have a difficult time enforcing the restrictive covenant, because the employee’s skills for such a position are certainly not unique enough such that the employer would be found to be protecting a legitimate business interest.

The increased use of non-competes for lower level positions is part of the inspiration for the proposed bans.  The proposed FTC rule was earlier opened for public comment, and the Commissioner of the FTC are expected to vote on the non-compete ban in April.   Stay tuned for future developments in both the New York and federal proposed bans on con-competes.

 Thomas J. McNamara is a partner at the law firm of Certilman Balin Adler & Hyman, LLP.