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On Behalf of | Aug 11, 2023 | Articles, Blog, Business Law, Publications

New York State is on the verge of joining a national trend among states enacting legislation that prohibits basically all non-compete agreements. On June 20, 2023, the New York State legislature passed a bill banning almost all non-compete agreements for all workers, regardless of their salary level or job function. The bill is expected to be signed into law by Governor Kathy Hochul.

A major concern among the New York business community is whether the new law would permit a non-compete agreement entered into in connection with the sale of a business.  For example, the laws in California, North Carolina and Oklahoma banning non-compete agreements provide limited exceptions for certain non-compete agreements entered into in connection with qualifying sale of business transactions.

Likewise, the January 2023 proposal from the U.S. Federal Trade Commission seeking to ban non-compete agreements also contained an exception stating that the ban would not apply to a non-compete clause entered into by a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity’s operating assets, when the person “is a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause.”

The proposed New York bill, however, contains no such explicit exception. Rather, the bill provides that:

“Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void. … [N]o employer or its agent, or the officer or  agent of  any  corporation,  partnership,  limited liability company, or other entity, shall seek, require, demand, or accept a non-compete agreement from any covered individual under the new law.”

Note the use of the term “covered individual.” Under the bill, a “covered individual” means any person who, whether or not employed under a contract of employment, performs work or services for another person on such terms and conditions that the individual is, in relation to that other person, in a position of economic dependence on, and under an obligation to perform duties for, that other person.

One may interpret the foregoing definition of “covered individual” to support a position that an individual who is selling their business is not a covered individual, and therefore may remain bound by a non-compete covenant, if such seller is not and will not be performing work or services for the buyer of the business.  Such a position, however, may be problematic if, as is often the case, the seller of the business will continue to provide services after the closing of the sale.

Our firm is continuing to check the status of the bill. If signed by Governor Hochul, it will become effective 30 days later. Our attorneys are available to answer any questions you may have now or after the law is signed and becomes effective. If you have any questions about the imminent New York non-compete prohibition or wish for us to examine how this law may affect your business in certain contexts, please contact Mauro Viskovic at 516-627-7000 or [email protected].

Weiss Zarett Brofman Sonnenklar & Levy, P.C., is a New York law firm providing a wide array of legal services to the members of the health care industry, including corporate and transactional matters, civil and administrative litigation, healthcare regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions.