January 11, 2024
On Dec. 23, 2023, Gov. Kathy Hochul vetoed the bill passed by both houses of the New York State Legislature that would have completely banned noncompete agreements and clauses between employers and their employees and in other business contracts. As a result, noncompete agreements will remain enforceable in New York for the time being, giving employers in New York that use them a temporary reprieve.
Noncompete agreements (noncompetes) prohibit an employee from working for a competitor or opening a competing business, typically for a certain period of time, after the employee leaves a job. A noncompete may be one section of an employment contract or a standalone contract that an employee signs before or after employment begins.
This show-down began five months ago when both houses of the New York State legislature passed a bill that outlaws “noncompete” agreements. Hochul had until Dec. 31, 2023, to make a decision on whether the State of New York would join the small number of states that have banned or strictly restricted noncompetes. For weeks, there were discussions about a compromise to have so-called “high earners” excluded from the legislation. Hochul suggested $250,000 as a cut-off, legislative lawmakers suggested $300,000, and a proposal supported by the bill’s sponsors suggested using an area’s median income as the standard. Hochul also proposed “grandfathering” existing noncompetes, meaning those employees already subject to one would not be affected (rather than what was stated in the legislature’s bill).
After vetoing the bill, Hochul stated that she “attempted to work with the legislature in good faith on a reasonable compromise.” She said she wants to take care of lower- and middle-income workers while also making sure “businesses stay” in New York. Labor groups have long argued that noncompetes hurt workers and stifle economic growth. On the other hand, businesses against the bill have argued that noncompetes are necessary to protect investment strategies and keep highly paid workers from leaving their companies with valuable information and working for an industry rival.
Although the bill was vetoed, Hochul expressed that she continues “to recognize the urgent need to restrict noncompete agreements for middle-class and low-wage workers” and is open to future legislation that achieves the right balance. Therefore, it will not be a surprise if there is a subsequent bill challenging the validity of noncompetes, so employers of all sizes should be prepared.
Caveat for Employers
Once again, these developments should provide an impetus for employers to revisit and review their employment agreements to ensure, if they use them, that noncompetes and other restrictive covenants are carefully crafted and tailored to fit their needs and appropriate for each particular employee. There are a variety of other protections that do not seem to be covered by the proposed legislation in New York that every employer should consider using to protect their investments in their employees, trade secrets and proprietary information, and to guard against unfair competition.