Author: Molly Donovan
At the end of June, the New York legislature passed a bill broadly prohibiting employer-employee non-competes, i.e., agreements or contractual provisions in which employers “prohibit or restrict” “covered individuals” from obtaining new employment after the conclusion of their current employment. Although the bill is not expected to be signed into law for a number of months, New York employers should prepare now by evaluating and developing alternative methods, besides non-competes, to protect customer goodwill and sensitive business information when employees depart. And although the bill is prospective only (it will apply to contracts first entered into or modified after the bill’s effective date), employers and employees, even outside New York, are wise to evaluate an overall approach to existing and future non-competes that may be unenforceable for other reasons (like the FTC’s proposed ban on non-competes).
Here are the highlights of the legislation:
- Under the bill, “covered individuals” is broad: any person who “performs work or services for another person;” is “in a position of economic dependence” on the other person; and has an “obligation to perform duties” for the other person. This appears to cover not just traditional employees, but also independent contractors and other non-employee service providers to the extent they can meet the (sure to be litigated) “economic dependence” and “obligation to perform duties” tests.
- The prohibition is broad: “No employer shall seek, require, demand or accept a non-compete agreement from any covered individual.” There is no carve-out for non-compete restrictions with arguable procompetitive justifications or benefits, and no carve-out based on rank, title or the likelihood that the at-issue employee has trade secrets or knows other confidential or proprietary information.
- Covered individuals will enjoy a private right of action to void contracts to the extent they prohibit or restrain them from competing, and courts may order all other “appropriate relief,” including liquidated damages ($10,000 per violation), lost compensation, damages, and reasonable attorneys’ fees and costs. There is a 2-year limitations period to bring these actions detailed in the bill.
Assuming the bill becomes law, what can employers do to protect client relationships and proprietary information when employees depart?
Non-disclosure agreements and non-solicitation agreements are still on the table. The bill says it doesn’t affect an employer’s ability to restrict the disclosure of trade secrets and other proprietary information, or the solicitation of clients whom covered individuals learn about during their current employment—so long as such agreements don’t otherwise violate the bill.
Those options may be somewhat effective from the employers’ standpoint, although the area may become a breeding ground for litigation—how far can a non-disclosure or non-solicitation provision go before it effectively precludes or impairs a covered individual from taking on new employment with a competitor of the current employer? Employers will need to think through the risks and benefits of these options carefully.
Paid “cooling off” periods may be acceptable although a situation could be imagined where taking time to cool off arguably restricts an employee from taking a new position if, for example, timing is crucial.
Other more creative solutions may be available on a case-by-case basis: perhaps a unilateral stick-and-carrot approach could survive scrutiny, but the standard contractual “non-compete” days are (soon to be) over.
Finally, employers, don’t talk to other companies about how everyone intends to respond to the law. Even the horizontal exchange of information (from one company to another company assuming the two companies compete for labor) about terms and conditions of employment can lead to serious – even criminal – antitrust scrutiny.