Quick look: Earlier this summer, it was announced New York may be next in line to ban non-compete agreements. The proposed bill follows suit with California which already has such law in effect. If the governor decides to sign, it could pave the way to making it a nationwide restriction, resulting in mixed reactions from the broker industry.
New York lawmakers have passed a bill which would ban non-compete agreements across the state. The fate lies in the hands of Governor Hochul who will make her determination regarding the proposal. Her signature could result in a major industry shift as the Federal Trade Commission (FTC) is already proposing a similar ban nationwide. If passed, New York would join California as a non-compete state, along with Oklahoma, North Dakota, and Minnesota.
Once the law is officially enacted, non-compete agreements will be considered unlawful. However, existing non-competes would remain enforceable, but there would be no retroactive application for any agreements enforced prior to the effective date (30 days after the bill is signed). And though there are certain exceptions, covered individuals would also be authorized to bring a civil court action against any employer or persons violating any prohibited provisions.
So, how will this affect the industry? For independent brokers, it could lift the limitations of when and where they can work, though for brokerage firms, it’s likely to increase competition when recruiting employees. Here’s a closer look at what brokers need to know:
Who is affected by the no non-compete bill?
Under New York AB A1278B, the bill will void “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind… [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.”
As outlined, it provides certain employment protections for independent contractors. However, brokerage firms may face a harder time preventing employees from being recruited by other companies. Due to the expected increase in competitiveness, it would result in higher employee costs and lower business value.
Brokers wouldn’t be restricted from seeking employment from rival companies and/or starting their own brokerage firm and soliciting co-workers to join. Therefore, greater investment into recruiting and retention will be necessary for firms to keep the best workers along with their books of business. Since client relationships remain a core part of the broker industry, this could be detrimental for companies unprepared for such changes.
Differences between non-compete and non-solicitation
Deploying a non-compete agreement means an employee agrees not to compete with another company for the contractually outlined time following employment. Whereas, with a non-solicitation agreement, the employee agrees not to solicit the company’s clients or employees to a new company. However, the bill remains open for interpretation as expressly written.
It does not prohibit the use of a non-solicitation clause but does say contractual provisions would not be able to “restrict competition in violation of this section.” It also notes these clauses extend only to clients the employee learned about during employment, which leaves the rules of engagement a little open-ended. After all, how does an employer/employee or the court determine or prove the initial engagement?
Governor Hochul has previously expressed support for banning non-compete agreements for workers earning below New York’s median wage, but the bill as proposed applies to all employees regardless of compensation levels. It’s to be determined whether she’ll insist upon clarifying language regarding who is protected under the law and how rules of engagement are determined.
How will the new law affect broker business if passed?
The language of the bill encompasses other restrictive covenant types in addition to non-compete contracts. Therefore, brokerages will need to consider the implications this will have on their workforce as some employees may have existing non-competes in place, while others may be excluded from such contracts (depending on when the law goes into effect).
Because the timing of non-compete contracts and other restrictive provisions is significant, it’s important for firms to fully understand what’s allowed prior to creating any future employment agreements and other restrictive covenants. Exceptions to the bill are few but include the following:
- Employee agreements with set terms of service
- Agreements prohibiting disclosing trade secrets or confidential and proprietary client information
- Agreements prohibiting the solicitation of employer clients the covered individual learned about during their employment
However, unlike California’s law and the proposed ruling by the FTC, the New York no non-compete bill does not currently include a sale-of-business exception.
Adjusting to a nationwide no non-compete industry
The spirit of a no non-compete is to protect workers from unfair conditions across all industries. This type of bill already feeds a candidate-driven market, which has affected companies over the past few years as workers have changed priorities and subsequently, their demands. Now, with the possibility of a New York state, followed by a nationwide, non-compete ban, it makes the workforce all the more competitive and limits financial relief for firms losing solicited talent.
As a broker-friendly professional employer organization (PEO), ExtensisHR provides transparency in all its partnerships and contracts. A broker’s engagement with their clients remains intact without recognition of a Broker of Record letter. Meanwhile, for business leaders requiring HR services for their own firms, ExtensisHR reduces employer risk and implements best practices to attain and retain top talent.
This newest piece of legislation is only one of many changing regulations employers must be wary of as they conduct business. One of the greatest advantages of having a PEO partner is it provides peace of mind by maintaining HR compliance as laws change, in addition to handling the HR responsibilities necessary for company growth.
Our team of risk and compliance experts support brokers and businesses alike. Learn how our comprehensive HR services can be customized to benefit you. Contact ExtensisHR today.