Employee Non-Compete Agreements in California Now Prohibited

Employee Non-Compete Agreements in California Now Prohibited

California is renowned for its robust pro-employee orientation in employment law, which can be traced back to its unique historical, political, and socio-economic landscape. Historically, the state’s progressive political movements and strong influence from labor unions have consistently championed workers’ rights and protections, prompting legislative responses, ensuring enhanced worker rights and conditions.

Furthermore, the state’s economic diversity, spanning from Hollywood’s entertainment industry to Silicon Valley’s tech hubs, necessitates comprehensive employment laws to address some unique challenges across varied sectors. As the most populous U.S. state with a global-scale economy, California often pioneers regulations and standards that eventually influence business practices beyond its borders.

One distinctive feature of California’s employment landscape is its stance on non-competition agreements, which are largely unenforceable, except in limited circumstances. Also known as a “Covenant Not to Compete” (CNC), these agreements are a contractual arrangement between two parties, usually between an employer and an employee, where the employee agrees not to enter into competition with the employer for a certain period of time after the employment relationship ends. The main goal of such an agreement is to protect the legitimate business interests of the employer.

However, recent changes in California’s legislation, namely the SB 699, have introduced a couple of new law provisions to these agreements that workers and employees all over the state should be aware of to make sure their rights are being protected. In this blog we will review:

• What is a Non-Compete Agreement? 
• SB 699: What You Need to Know
• What To Do If Your Rights Are Being Threatened

Are your labor rights are being threatened?

What is a Non-Compete Agreement?

Non-compete agreements in California are unenforceable (with some statutory exceptions), a stance that reflects California’s public policy in favor of open competition and employee mobility. Specifically, California Business and Professions Code Section 16600 provides that:

“Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.“

The following are the main components of a non-compete employment agreement in California:

Scope of Activity

This defines the specific types of business activities or services the departing employee is prohibited from engaging in. For example, if someone worked for a software company, the non-compete might prevent them from starting a similar business or working for a direct competitor.

Geographical Limitations

The agreement often includes geographical boundaries where the employee can’t compete. This could range from a specific city, to a state, to even an entire country, depending on the nature of the business.

Duration

The non-compete employment agreements in California will specify how long the employee must refrain from competing. This could be anywhere from a few months to several years, though the time period needs to be reasonable to be enforceable.

Consideration

In contract law, for a contract to be valid, there must be consideration, or something of value exchanged. In the case of a non-compete agreement in California, the consideration is often the job itself for new employees. For existing employees, it might be a promotion, bonus, or other compensation.

Enforceability

The enforceability of non-compete agreements in California is very clear. Courts might look at several factors to determine if a non-compete is enforceable, including:

• Whether the employer has a legitimate business interest to protect.
• Whether the restrictions are reasonable in scope, geography, and duration.
• Whether the non-compete imposes an undue hardship on the employee.

If a court finds the terms of a non-compete to be overly broad or unreasonable, it may choose not to enforce the agreement as written, or it might modify the agreement to make it more reasonable.

Reasons for Use

Companies use non-compete agreements to protect sensitive information, maintain customer relationships, safeguard trade secrets, and prevent employees from transferring the skills, knowledge, and training provided by the employer directly to a competitor.

Alternatives

Sometimes, instead of or in addition to non-compete agreements, companies use non-solicitation agreements (preventing former employees from soliciting the company’s clients or other employees) or confidentiality agreements (preventing the sharing of proprietary information).

Controversies

Non-compete agreements are controversial because they can potentially restrict an individual’s right to work in their chosen field, especially if they’re too broad in scope or duration. Critics argue that they can stifle competition, innovation, and employee mobility. Some states in the U.S., like California, largely prohibit the use of non-compete agreements for this reason.

When considering a non-compete agreement, it’s advisable for both employers and employees to consult with legal counsel to ensure the agreement is fair, reasonable, and enforceable.

SB 699: All You Need To Know

The state operates on the belief that impeding an individual’s ability to work or initiate a business in their domain not only curtails individual freedoms but also hampers competition and innovation.

However, this doesn’t mean that certain parties don’t try to bypass these regulations. Some employers, particularly those unfamiliar with California’s stringent laws, might attempt to enforce non-compete agreements or engage in practices that violate the state’s pro-employee stance on this matter. Some of the most common violations are:

1. Attempting to Enforce Non-Compete Agreements: Employers might attempt to enforce non-compete agreements in California against former employees, which is a serious violation of the state’s law.
2. Out-of-State Employers Imposing Non-Compete Agreements: Employers headquartered outside California might mistakenly believe they can enforce non-compete agreements against California-based employees, under the laws of a different state where non-compete agreements might be permissible.
3. Drafting Overbroad Confidentiality Agreements: While California allows for the protection of trade secrets through confidentiality agreements, some employers might draft these agreements too broadly, veering into non-compete territory.
4. Imposing Non-Compete Agreements Upon Sale of a Business: Though an exception exists allowing for non-compete agreements in the sale of a business, these agreements must be reasonable in terms of geographic scope and duration.
5. As a Condition of Employment: Some employers might require employees to sign non-compete agreements as a condition of employment, which could be deemed a violation.
6. Retaliation Against Employees: If an employer retaliates against an employee for refusing to agree to a non-compete clause or for challenging the legality of such a clause, this could be a violation of California’s employment laws.
7. Misclassifying Employees to Circumvent the Law: Some employers might misclassify employees as independent contractors or in other capacities to circumvent California’s laws against non-compete agreements.

In this sense, S.B. 699 strengthens California’s commitment to employee mobility, emphasizing that CNCs are null and void, regardless of their timing or location of signing. This bill introduces new avenues for legal recourse in case of a violation, mandating attorney’s fees for the winning employee to deter and take action against infringing employers, whether based in California or elsewhere.

That last point, however, has proven controversial, being seen as overreaching (and potentially unconstitutional) because it seeks to be enforced outside of California’s borders. Using a good example of The National Law Review, if a non-compete agreement exists between an employer and an employee in another state (let’s say, Nevada), but the employee chooses to work for a California employer, that Nevada-based non-compete would be void under SB 699. Yes, even if the worker remains in Nevada.

Nevertheless, SB 699 is a positive for any California employee, ensuring that predatory clauses and non-compete agreements in California during employment can be persecuted without fear of retaliation or further economic damages.

What To Do If My Rights Are Threatened?

If you believe your labor rights are being threatened or violated in California, it’s crucial to take proactive steps to address the situation and safeguard your rights. And to ensure your rights are safeguarded you must obtain legal representation from a team of expert employment lawyers.

Labor Law Advocates is here to help you. We offer our premier legal guidance for any employment-related conflicts you might encounter. Our seasoned team of employment attorneys are well versed in the challenges that today’s workforce faces, such as discrimination and harassment to unreceived wages and benefits, to unfair and unlawful enforcement of non-compete agreements. We champion workers’ rights, ensuring they receive the fair and respectful treatment they deserve. No employer is too formidable, and no job is too modest for our representation, so call today at (424) 688 3632 or contact us through our form. We are available 24/7, so don’t hesitate to make your voice heard!