NY Noncompete Ban Needs Salary Cap Deal to Recover From Veto

The 11th hour veto of a noncompete clause ban by New York Gov. Kathy Hochul (D) has sent state legislators and powerful business groups back to the drawing board in 2024 to resolve the contentious issue of how to create a carve-out for highly paid workers.

New York was close to becoming the fifth state to outlaw noncompete clauses in virtually all employment contracts until Hochul declined Dec. 22 to approve the legislation (S3100) amid pressure from Wall Street, hospitals, and business groups. In her veto message, Hochul said the bill’s “one-size-fits-all” approach did not work in New York, given the state’s widely varying industries and need to retain high-paid workers.

The successful enactment of a noncompete ban in New York, a top global financial and commercial hub, would set the tone for the many other states whose legislatures have targeted noncompete agreements, as well as the Federal Trade Commission which is considering a nationwide ban.

“It’s not a matter of if New York will ban noncompete agreements, but when,” said State Sen. Sean Ryan (D), the key sponsor of the 2023 measure, said in a statement following Hochul’s veto.

Ryan said he will reintroduce a bill this year, but his spokesperson declined to comment further on his next steps.

Lawmakers will likely adopt a salary cap that excludes high-earners from a noncompete ban to get a new bill across the finish line, but the debate in New York will center on what the actual threshold should be, according to management-side employment attorneys.

“The conversation is really getting focused on lower-wage workers who don’t have the same type of business support and need for noncompetition,” said Matthew Fontana, a partner at Faegre Drinker Biddle & Reath LLP.

“I think there’s plenty of middle ground for compromise on the idea that noncompetes are not appropriate for certain workers,” he said.

The governor had considered state Senate leaders’ offer to exempt workers earning more than $300,000 per year, but negotiations ultimately were not finished before Hochul’s deadline to act on the bill. The state’s business community had earlier floated a lower $250,000 income cap, which Hochul has signaled she supports.

Norman Bishara, a professor of business law and ethics at the University of Michigan, agrees that having salary thresholds is logical because noncompetes for lower wage positions create a “chilling effect.”

“Even if the noncompete isn’t necessarily enforceable, it prevents people from making the decision to go to another company, leave, and begin a startup,” Bishara said. “If they do leave, these workers are incentivized to stay out of the workforce and not contribute to the economy. So the noncompetes, whether it’s intentional or not, lead employers to influence decisions they don’t have the legal right to influence.”

States of Play

An estimated one in five US workers or 30 million people are bound by noncompete agreements, including millions of hourly workers, according to the FTC.

Minnesota last year became the fourth state to ban virtually all employee noncompetes, joining California, North Dakota, and Oklahoma. Meanwhile, at least 10 other states have partial bans or restrictions on the terms of a noncompete.

A ban would expand the pool of candidates, improve the job mobility of workers, and provide an overall boost to the economy and entrepreneurship, labor unions and other worker advocates have argued.

Business groups have countered that there are legitimate uses for noncompetes as they prevent workers from leaving and taking company trade secrets and other confidential information with them.

New York lobbying records show a range of businesses and labor groups pressuring lawmakers and Hochul on the bill in September or October of 2023, including AFSCME International, Charter Communications, Goldman Sachs, and JPMorgan Chase Holdings.

Employers can invoke trade secret protection laws and nondisclosure and non-solicitation agreements to protect their proprietary information without imposing the harmful effects caused by noncompetes, said John Lettieri, president and CEO of Economic Innovation Group, a bipartisan public policy group that supported last year’s bill.

“It is clear from examples around the country that there are other ways to protect those legitimate interests. And unfortunately, it looks like the governor has accepted that flawed reasoning in the way she made her decision,” he said.

“Employers themselves are hurt by noncompetes” because these clauses “shrink the pool of who they can hire, even if they’re offering better wages, benefits, and shorter commute,” Lettieri said.

A partial ban would have little to no impact on noncompetes employers have long used to prevent top talent—specifically highly compensated workers like senior top executives and sales representatives privy to private information—from moving to a new employer or creating new ventures, according to employment attorneys.

Adopting a salary threshold is a “logical” compromise position, said Julie Werner, a partner at Lowenstein Sandler.

Sticking Points

Illinois set its salary threshold under which noncompetes are null at $75,000, while Washington state and Washington, D.C., placed theirs at $120,559 and $150,000, respectively. Rhode Island bans noncompetes for workers earning less than 250% of the federal poverty level.

“It’s hard to base these things off of what other states have done because what it means to make a certain dollar amount differs depending on your location. $75,000 in Illinois means something totally different than $75,000 here,” Werner said. “New York has a higher cost of living, so it’s not unreasonable to suggest that the salary threshold should be higher.”

State courts in New York and elsewhere typically dislike enforcing noncompetes in many instances, particularly in cases where the former employer seeks to block a low-wage worker from a new job, as it’s hard for companies to prove that losing the person will harm their business, Werner said.

A potential separate sticking point for a new noncompete bill is the inclusion of an exemption for buyers and sellers in certain sale-of-business transactions.

The initial New York proposal didn’t address this issue, though all 11 states with noncompete restrictions offer this carve out, at least for a set period of time following the transaction.

“It’s extremely common for New York, arguably the business capital of the world, to be the choice of law for many of these corporate transactions,” Werner said. “Even in California, where noncompetes are prohibited, there’s a very clear exception for the sale of a business. So to leave that out of the New York bill was very strange to me.”