Non-compete agreements (or NCAs) are only legal in specific circumstances in the state of California. In March of 2022, Attorney General Bonta sent out an official press release reminding employers and workers that workers can not be required to sign a non-compete agreement, nor can they be required to follow a non-compete agreement that was signed. Employers are also forbidden from firing an employee for refusing to sign, therefore protecting employees from being unable to work with a competitor after previous employment.
According to the California AG’s office, “Even when invalid, these agreements can discourage workers from seeking new opportunities, causing workers in a variety of professions to mistakenly believe that they cannot pursue or accept a competitor’s offer of better pay or working conditions in fear of facing legal repercussions. From software engineers to baristas, those in noncompete agreements may believe that their only option is to continue to work for their current employer.”
What Does a Non-Compete Agreement Typically Mandate?
Employers like non-compete agreements because they can potentially gain financial benefit by ensuring employees don’t share intellectual property (IP) at a future date. However, California law recognizes that a restrictive contract can make an employee unable to pursue their own livelihood.
Generally, a non-compete agreement is a legal agreement or clause in a contract signed at the beginning of employment barring employees, contractors, consultants, etc. from entering into competition with the previous employer after the employment period is over. This type of agreement also prohibits employees from revealing any information or trade secrets involving the company to outside parties.
Typically, said contracts specify a length of time in which the employee is mandated from working with a competitor. However, if there is no specified end period, a non-compete agreement may prevent the employee from working with any competitor after their employment is over—even if they were terminated or resigned, and regardless of whether the new job does not involve disclosing trade secrets.
The majority of non-compete agreements contain the following pieces of information:
- Names and address of the parties involved
- Agreement’s effective date
- Purpose of the agreement
- Geographic areas affected by the agreement
- Compensation provided and terms
- Dated signatures of both agreeing parties
- Exhibits and attachments for detailed information
The validity and enforcement of non-compete agreements vary depending on jurisdiction. Even in states where non-competes are legal for employers, the laws generally recognize that NCAs can put undue restrictions on an employee from being gainfully employed. Therefore, there are many details to the laws as to what constitutes an unnecessary burden; a signed NCA may not even be legal depending on the laws in a particular jurisdiction.
Appropriate Use of Non-Compete Agreements (NCAs) in California
There are three narrow exceptions in California where non-compete agreements are enforceable. Here are a few examples:
- Sales of Businesses – Someone selling a business may be bound under a contract forbidding the seller from opening a competing business in the same geographic area as the original business.
- Limited Liability Companies (LLC’s) – If a shareholder in a limited liability company decides to sell or dispose of the all shares a non-compete agreement may be enforced, a non-compete agreement is allowed; and
- Partnerships – If a partnership is dissolved, a non-compete agreement may be drawn and enforced.
The only protection California employers are offered is in the case of misappropriation of trade secrets. The court must be fully convinced that:
- The trade secret is “found to derive independent economic value” and poses a risk to the business if information is exposed to competitors or to the public; and
- The trade secret owner has made efforts to keep the information private from the public.
What Happens if the Non-Compete Was Signed in a State Outside California?
California law prohibits employers, including those who operate out of state but employ California residents, from enforcing non compete agreements. If a non-compete agreement is made in another state or includes a choice-of-law provision requiring enforcement of the agreement to be governed by the laws of another state, California will not enforce choice-of-law provisions where it violates California’s public policy.
How Do Non-Solicit Agreements Compare to Non-Compete Agreements?
A non solicitation agreement prevents an employee from soliciting the business of specific customers of the employer, generally within a specific period of time. Like non-competition agreements, California Business and Professional Codes also prohibit non-solicitation agreements.
However, a non-solicitation agreement contract could be still enforceable as long as it’s tailored reasonably for the situation and does not infringe upon employee rights. The specific details determine the legality, which is why it’s critical to get the assistance of an expert employment attorney.