Promotional products businesses and other companies based in New York could potentially soon be prohibited from using noncompete clauses with many of their employees.

Gov. Kathy Hochul is considering signing legislation that, as currently written, would ban noncompete clauses for virtually all workers in the Empire State, where promo distributors generated $935 million in sales in 2022, highest among all states in the Northeast and fifth overall in the nation, according to ASI Media’s 2023 State & Regional Sales Report.

Still, it’s uncertain whether or not the bill will earn Hochul’s signature without some changes. The governor said recently that she’d like to see certain limited exceptions.

Those include that noncompetes could be used for high-earners – possibly those making over $250,000 annually. Hochul also indicated she’d be interested in a sale-of-business exception. This could prohibit the former owner of a company that just sold that business from starting a new competing business or working for a direct competitor – for a time.  

State Sen. Sean Ryan, who spearheaded the noncompete ban legislation, indicated to The Wall Street Journal that he’s not in favor of a compensation threshold at which noncompetes could kick in. Noncompetes “depress wages, increase prices and are really bad for the entrepreneurial part of the economy,” he told the Journal.

Ryan added that if Hochul were to open negotiations on the bill, he would consider trying to insert language that would erase existing noncompete agreements in New York.

The noncompete bill is one of many Hochul is contemplating signing before year’s end, but it’s possible finalized legislation on it wouldn’t cross her desk until early in the new year given her stated desire for changes, according to various media reports.

Sbhd: Divided Opinions

A noncompete clause essentially prohibits one party (a worker) from taking another job or starting a business in a similar profession and/or region that competes against another party (the employer).

The proposed ban has stirred controversy in New York: Some business groups oppose the proposal, saying it will hurt the state’s businesses and thus its economy, and others say it’s essential to protect workers and allow them to earn a livelihood.

Howard Potter, owner/CEO of Utica, NY-based distributor/decorator A&P Master Images (asi/102019), is opposed to a ban on noncompete clauses. His company currently uses them.

“The deal is that you have to work 50 miles away from our company, and if you want to start your own company in our line of work you need to wait one full year after working for us,” Potter told ASI Media.

An FTC-proposed ban on noncompetes is sharply dividing opinion in the #promoproducts industry. This special report has everything you need to know about the proposal and how industry pros are reacting to it.https://t.co/zU00xcMuWJ@ASI_MBell @Tim_Andrews_ASI @asicentral

— Chris Ruvo (@ChrisR_ASI) February 17, 2023

It’s unfair, he asserted, for an employer to invest in training an employee, especially on proprietary processes or systems, and then have the worker take the knowledge and launch a business that competes directly with that employer.

$935 Million: Promotional products sales in New York in 2022, a 4% increase over the prior year. (ASI Media’s 2023 State & Regional Sales Report)

Potter said a noncompete ban would lead to higher turnover rates and stunt growth in promo and other industries – and potentially lead to higher labor costs and more complicated internal processes.

“You will need more employees to break up all of the sections of a process, so you do not have to worry about people jumping ship to take your knowledge for themselves,” Potter said.

The Federal Trade Commission (FTC) is considering implementing a rule that would ban most noncompete agreements nationally. As Potter’s comments indicate, the potential ban has stirred strong opinions in the promo products industry. Indeed, other industry pros have quite opposite views to Potter on a noncompete prohibition.

“Noncompetes for employees are ridiculous,” Russell Baingo, president of distributorship P’zazzz Industries, Inc. (asi/155184), told ASI Media earlier this year. “Some companies use this tool unfairly when letting someone go. This poor employee, who worked in the industry and this is his life, now can’t work in the industry any longer. That’s unfair.”

Sbhd: The FTC Weighs In

Sarah Mackey-Barr, deputy director of the FTC’s office of policy planning, wrote to Hochul about New York’s potential ban.

Mackey-Barr’s letter laid out various findings that support the case for banning noncompetes. She stated that banning non-compete clauses could increase workers’ earnings by approximately $250 to $296 billion per year.

“The FTC preliminarily determines that noncompete clauses negatively affect competition,” Mackey-Barr wrote. “It also preliminarily determines that non-compete clauses are exploitative and coercive, both at the time of contracting and at departure, for all workers except for senior executives.”

As of this writing, the FTC was still working to finalize its rule, which if it does ban noncompetes, will likely face legal challenges that could delay implementation. The FTC received more than 21,000 comments on the proposed rule during a public comment period that concluded in April 2023. It’s evaluating those comments as part of its final rulemaking.

Currently, there’s not a universal federal standard on noncompetes. Things vary from state to state, but most impose what authorities generally term as reasonable restrictions on noncompetes, such as limiting scope, duration and the type of restrictions allowed. California, North Dakota and Oklahoma have taken a harder line, ruling that noncompetes are void, with limited exceptions, within their borders.

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