By Kirsten M. Grossman, Esq.
UPDATE – On December 22, 2023, Governor Hochul vetoed Bill S3100A.
In the wake of President Biden’s July 2021 Executive Order on Promoting Competition in the American Economy directing federal agencies to ban agreements that impact worker mobility and the Federal Trade Commission’s still-pending proposed rulemaking invalidating non-compete provisions (discussed HERE), two recent events have placed in substantial question the ongoing viability and enforceability of non-compete agreements between companies and their workers in the United States.
On May 30, 2023, Jennifer Abruzzo, General Counsel of the National Labor Relations Board, sent a memorandum to all Regional Directors, Officers-in-Charge, and Resident Officers setting forth her opinion that the proffer, maintenance, and enforcement of non-compete provisions violate the National Labor Relations Act (“NLRA”), except in certain limited circumstances.
According to the memo, non-compete agreements are unlawful because they tend to chill employees from exercising their rights under Section 7 of the NLRA. Section 7 protects employees’ rights to take collective action to improve working conditions. The memo states that employees could construe non-compete agreements to deny them the ability to quit or change jobs because the provisions cut off employee access to other employment opportunities and “employees know that they will have greater difficulty replacing their lost income if they are discharged for exercising their statutory rights to organize and act together to improve working conditions . . . .” The memo also notes that non-compete provisions undermine the bargaining power of employees in the context of lockouts, strikes, and other labor disputes.
On the same day that General Counsel Abruzzo issued her memo, eleven advocacy organizations and think tanks wrote to National Economic Council Director and White House Competition Council Chair Lael Brainard explaining the position of those organizations that workers need protection from non-compete clauses in line with the FTC’s proposed rulemaking. The four-page letter argues, among other things, that the proposed rule is “extraordinarily popular with all segments of the public” and that the FTC had already received over 20,000 public comments during the rulemaking process, almost all supporting the proposed ban. However, the letter notes that while the FTC’s proposed rulemaking is very broad in its scope, the FTC’s jurisdiction does not extend to certain employers. As a result, the letter urges the White House Competition Council to “direct the relevant federal agencies to examine their legal authority and enforcement powers to fill in any potential gaps in the proposed non-compete rule that may be left by the limits of the FTC’s jurisdiction.”
In addition to the NLRB’s General Counsel and the FTC, the New York State Senate recently took a strong position against non-compete provisions, passing Bill S3100A on June 7, 2023. If enacted, the legislation would prohibit an employer from seeking, requiring, demanding or accepting a non-compete agreement from any worker. The statute broadly defines non-compete agreement to include any agreement “that prohibits or restricts [a] covered individual from obtaining employment, after the conclusion of employment with the employer.” Notably, agreements protecting the confidentiality of trade secrets or other confidential or proprietary information and those preventing solicitation of clients that the worker learned about during their employment are excluded from coverage. An individual who has been subject to a prohibited non-compete agreement may bring litigation against the employer and, if successful, a court may void the non-compete agreement as well as order injunctive relief, payment of liquidated damages of not more than $10,000, lost compensation, and reasonable attorneys’ fees and costs.
The Bill is now being considered by the New York State Assembly and, if passed, must still be signed by Governor Kathy Hochul; if signed, the ban will apply to contracts entered into or modified thirty days later. Although Governor Hochul previously has shown support for limitations on non-compete agreements for low-wage workers, it is unclear whether she will sign legislation that broadly bans most non-compete agreements. We will continue to monitor this legislation.
NFC’s attorneys can assist employers in navigating the emerging support for the prohibition of non-compete agreements. In many instances, a non-solicitation and/or non-servicing provision may accomplish the goals of a non-compete provision. Please contact us if your business requires assistance in this evolving area of the law by reaching out to the NFC Attorney with whom you typically work or calling us at 973.665.9100.