In a significant move towards protecting worker mobility, the New York State Legislature approved a bill that would render nearly all new non-competition agreements for workers void. New York Governor Kathy Hochul was deliberating whether to sign or veto the groundbreaking bill.
What Is the Purpose of a Non-Compete Agreement?
These agreements are a common fixture in employment contracts and typically restrict employees from pursuing new job opportunities or establishing their own businesses for a specified period after leaving their current employer so as not to harm the employer’s business.
The key objectives of a non-compete include safeguarding confidential information, trade secrets, and proprietary business knowledge from being exploited by a departing employee for the benefit of a competitor. While the overarching goal is to strike a balance between protecting employers and providing employees with reasonable career opportunities, the enforceability and limitations of non-compete agreements vary based on jurisdiction and applicable laws.
The potential legislation was proposed by State Sen. Sean Ryan and has ignited discussions on the need for such restrictions and the potential implications for both employers and employees.
Banning Non-Compete Agreements
The proposed legislation would have modified the New York State Labor Law by introducing a new Section 191-d. This new section would prohibit employers, corporations, partnerships, limited liability companies, or other entities from soliciting, mandating, requesting, or accepting a “non-compete agreement” from any “covered individual” and would declare void to the extent necessary every contract restraining an individual from engaging in a lawful profession, trade, or business of any nature.
Governor Hochul indicated a desire for a compensation cap to accompany the proposed ban on non-compete agreements. She suggested a cap of $250,000 as the threshold above which such agreements would be permissible. Notably, the bill applied to workers across the board, irrespective of their compensation levels.
The proposed legislation has spurred a contentious debate, with proponents advocating for enhanced worker rights and greater labor market flexibility. One of the key arguments supporting the ban on non-compete agreements is that they can stifle innovation and hinder professional growth. Advocates contend that by restricting employees from freely moving between jobs or venturing into entrepreneurship, non-compete agreements limit competition and impede the development of a dynamic and agile job market. Furthermore, proponents argue that such agreements disproportionately affect lower-wage workers who may lack the resources to challenge or negotiate the terms of these restrictive covenants.
On the other hand, critics argue that imposing a compensation cap may inadvertently hinder the growth of startups and emerging businesses. State Sen. Sean Ryan’s reservations about the compensation cap highlight the complexities surrounding this proposed legislation. While recognizing the need to protect workers, Ryan underscores the potential negative consequences for startups, which often rely on attracting top talent with specialized skills. The delicate balance between fostering a competitive job market and safeguarding emerging businesses underscores the challenges faced by policymakers in enacting legislation that promotes economic growth while ensuring fair labor practices.
An Update on New York Governor Kathy Hochul’s Decision
Just recently, Gov. Hochul vetoed the legislation that would have banned employee non-competes in New York, but employers can expect a revised bill to be introduced next year.
New York would have become the second most populous state to prohibit such clauses, aligning with California, where this restriction has been in effect for over a century.
Non-Compete Agreement Valuations
Valuing non-compete agreements involves assessing their worth and impact on businesses. Valuation firms like ours consider factors such as the duration and geographic scope of the non-compete, the industry involved, and the specific skills or knowledge the employee possesses. The goal is to determine the economic value of protecting proprietary information, client relationships, and trade secrets. Businesses may seek to quantify the potential financial harm that could arise if a departing employee were to compete directly.