Step Aside, FTC: NYC to Banish Non-Competes

The FTC's proposed ban on labor non-competes has loomed since January 2023, with a vote now scheduled for April 23, 2024 in a special Open Commission Meeting. New York City recently joined the growing number of states that are seeking to enact their own ban on labor non-competes.

On February 28, 2024, the New York City Council introduced three separate bills to ban or limit non-competes for employees and independent contractors in New York City. 

1. Introduction 140 would prohibit all non-competes prospectively and rescind existing non-competes retroactively, and subject employers to a civil penalty of $500 per violation. Introduction 140 does not contain any carveouts--even of limited scope--for individuals who may possess trade secrets or other competitively sensitive information. It is a blanket ban to solve perceived problems about labor mobility and competitiveness in New York City.
2. Introduction 146 would prohibit the use of non-competes with “low-wage employees,” defined as a clerical or other worker under New York's labor laws (i.e., all employees other than manual workers, railroad workers, commission salesman, and persons “employed in a bona fide executive, administrative or professional capacity”) earning less than $1,300 weekly (approximately $67,600 annually). That threshold is significantly lower than the $250,000 threshold that business groups lobbied for in connection with the Statewide non-compete ban that Governor Kathy Hochul vetoed (discussed further below). The bill also establishes notification requirements for non-competes with non-low-wage employees, but does not retroactively rescind non-competes. 
3. Finally, Introduction 375 would prohibit the use of non-competes in contracts for freelance work unless the hiring party compensates the freelancer for the duration of the non-compete. It is notable in that it effectively endorses the concept of gardening leave.

All three bills under consideration are limited to the employer-employee relationship and have no impact on non-competes incidental to M&A activity. If any of the bills are passed, they would become effective 120 days after signing. 

New York City's efforts follow on the heels of the failed Statewide ban on non-competes. Governor Hochul announced an initiative in January 2022 to strengthen workers' rights, including banning non-competes for workers making below the median wage. The New York legislature passed a non-compete ban in June 2023, but with no compensation threshold and limited exceptions. The legislation was also silent about whether it prohibited non-competes between businesses related to M&A activity--reportedly a point of contention. Governor Hochul ultimately vetoed that bill in December following a reported breakdown in negotiations with the legislature about where to set a compensation threshold and how bonuses and stock options should be taken into consideration.

If New York City succeeds in banning labor non-competes, it will become the second largest economic center of the country to do so, after California. Not only has California long banned non-competes, the state enacted legislation in September 2023 and October 2023 to strengthen its prohibitions on non-competes. Non-competes could be banned in states and cities comprising over a third of U.S. GDP. Last month, Washington enacted legislation to expand the definition of a non-compete and limit the use of non-solicitation provisions. And proposed bans--complete or with carveouts--are pending in Illinois, Maine, Massachusetts, and other states. 

As a result, national businesses may reconsider their use of non-competes independent of the FTC's proposed rule. Even if the FTC's final rule is challenged and struck down, the FTC's goal to ban non-competes may still be achieved through a patchwork of state and local legislation affecting major commercial hubs like New York City.