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New York Governor Kathy Hochul in late December vetoed a bill that would have authorized courts to void non-compete agreements, provisions that employment contracts sometimes include to limit employees’ choices regarding where and when they may accept a job with another employer.

The governor vetoed the legislation—SB S3100-A, which the New York State legislature passed in June—because lawmakers did not agree, apparently, on an income cap that would have limited the proposed ban to only lower-paid workers.  It’s likely that the interested parties will eventually agree on income cap-related terms, however, and the governor will likely sign a version of the bill that is otherwise similar to its most recent iteration, which leaves several questions unanswered.

The Governor’s Push for an Income Cap—A Sticking Point

At a press conference in Manhattan, Governor Hochul told reporters that she would support a non-compete ban that protects lower- and middle-income workers while still giving businesses the opportunity to restrict the employment options available to employees such as “top-paid lawyers” and professionals such as financiers who are “well-equipped to negotiate on their own behalf.” To that end, the governor’s team pushed for a ban that would apply to only employees who earn less than $250,000. Senate Democrats supported a higher threshold.

At meetings in the governor’s office in late December, lawmakers reportedly failed to agree on the terms of an income cap that would restrict the proposed non-compete ban’s applicability, resulting in the veto.

Sean Ryan of Buffalo, one of the bill’s sponsors, has said that he will reintroduce the legislation in 2024. In light of the fact that about half of the nation’s states have imposed severe limits on non-compete clauses, some version of the legislation likely will be signed into law. While the terms of that legislation’s income cap provisions remain undetermined, SB S3100-A’s less contentious terms likely will be included in the non-compete ban that is ultimately enacted, and those terms leave several questions unanswered.

Questions Left Unanswered

If Gov. Hochul does eventually sign a version of SB S3100-A, that version likely will include language that raises the following questions:

• SB S3100-A applies to individual humans, defined as “covered individuals” who are “in a position of economic dependence” on the contracting party. This presumably includes not only W-2 workers but also independent contractors and “gig workers.”
• The legislation banning by the legislation restricts employees’ freedom to pursue employment opportunities after the “conclusion of employment” with the contracting party. This language presumably means that the legislation allows non-compete agreements that restrict workers’ freedom to pursue employment opportunities while they are employed by the contracting party.

Some contracts provide for payments to exiting employees by, for example, keeping the employee on the payroll for a period of “garden leave.” Because the definition of “non-compete agreement” in the New York legislation depends upon the words “after the conclusion of employment,” 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.

• SB S3100-A states that it 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 entered into before the legislation takes effect. There is some legislative history suggesting that the legislature thought SB S3100-A would invalidate existing agreements.

The legislation also doesn’t specify how “modified” a contract would have to be for SB S3100-A to apply. Would SB S3100-A apply, for example, to an employment agreement with a non-compete provision that is modified to extend the employment term? Will a judge have authority to void an entire contract or merely a non-compete covenant that has been modified 30 days after SB S3100-A is signed into law?

• California’s non-compete ban allows non-compete covenants contained in sale-of-business agreements, but New York’s version of the law does not explicitly contain that limitation. It is, therefore, unclear whether a court interpreting New York’s non-compete ban will enforce a non-compete covenant contained in a sale-of-business agreement. For example, a member of an LLC is typically not deemed an “employee,” whereas a corporate shareholder who toils for the corporation is typically classed as an “employee.” Could it be that the conditional words “after the conclusion of employment” mean that the legislation’s effect on equity owners in corporations or LLCs will vary when they sell the business?
• The New York legislation does not prohibit only an employer entity 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, those who act in concert with the employer could be held personally liable.
• The legislation states that it should not be read to affect an employer’s ability to enter into an agreement that prohibits: (1) the disclosure of trade secrets and confidential client information, or (2) solicitation of the employer’s clients.

This limitation likely will make confidentiality agreements more valuable than ever.

The legislation conditions the limitation of its effect on confidentiality agreements and client-solicitation prohibitions, however: SB S3100-A states that such agreements cannot “otherwise restrict competition in violation of this section.”

What does the “otherwise restrict” language encompass? With this language, the legislature likely intends to deem confidentiality and non-solicitation clauses generally enforceable. 

A more vexing question is whether the legislation is intended to prohibit enforcement of a whole agreement simply because it includes, for example, a non-solicitation provision inhibiting the next employer from hiring the worker? More likely, the legislation’s drafters intended to establish that the enforceability of a whole agreement should not hinge on whether the agreement contains a non-compete, when it contains confidentiality or anti-client-solicitation language. 

The legislation’s drafters might have intended for courts to throw out a whole agreement, however, in circumstances where there is evidence to support the proposition that the employer declined to hire the employee because the employer didn’t understand what was—and was not—permissible for the employee.