California law has long made employee noncompete agreements void and unenforceable other than as to a selling owner of a business. New legislation, effective January 1, 2024, goes further. Now, it is illegal to include a purported noncompete provision in an employment agreement at all. Doing so is actionable by the employee for damages and attorney fees. The California law applies (or purports to apply) to all employers and all employees anywhere, whether within California or not. Not only that, employers with existing noncompete provisions must affirmatively notify their workers that the noncompete provision is void and no longer part of the contract. This is California’s part of a movement to ban noncompete provisions nationwide. Here are the critical elements of these legislative changes and their implications for California businesses.
Key Provisions of the New Legislation
Prohibition of Noncompete Provisions
Existing Law: Section 16600 of the California Business and Professions Code 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.”
New Law: Section 16600.1(a) states in relevant part that it is “unlawful to include a noncompete clause in an employment contract, or to require an employee to enter a noncompete agreement”.
Some employers, particularly out of state employers, have made a practice of including noncompete provisions in employment agreements despite California’s prohibition on enforcing such provisions. The legislature found this has a “chilling effect on employee mobility.” Employees are often afraid to breach the agreement, even though California law holds it void and unenforceable. This law addresses that practice directly by making it illegal for the employer to put the clause in the contract in the first place.
Employee Rights of Action and Recovery
Section 16600.5(e) creates a new right for employees to initiate lawsuits against employers for including noncompete clauses in employment agreements. Successful plaintiffs are entitled to recover damages, injunctive relief, and attorney fees, creating a significant shift in the enforcement dynamics of these agreements.
The Law’s Application Reaches Beyond California
Section 16600.5(a) provides that the above provisions apply to any contract “regardless of where and when the contract was signed.” This means that a California court will not enforce a noncompete provision in California, and will support a right of action against an employer, regardless of whether both the employee and the employer were outside California when the contract was signed and the services were rendered.
Notice Requirement for Existing Agreements
Businesses are now required to notify current and former employees that any previously signed noncompete agreement, or noncompete provisions within existing agreements, are void.
Section 16600.1(b)(1) provides “For current employees, and for former employees who were employed after January 1, 2022, whose contracts include a noncompete clause, or who were required to enter a noncompete agreement, that does not satisfy an exception to this chapter, the employer shall, by February 14, 2024, notify the employee that the noncompete clause or noncompete agreement is void.”
Furthermore, the notice “shall be in the form of a written individualized communication to the employee or former employee.”
Implications for California Employers
This legislation signals a clear directive from the state of California against the restriction of employee mobility through noncompete agreements. For businesses, this means a reevaluation of employment contracts and practices is necessary. Employers must carefully navigate these changes to comply with the new requirements while safeguarding their proprietary interests and competitive advantages.
Practical Steps for Compliance
- Review Existing Agreements: Employers should conduct a detailed review of all existing employment contracts, employee handbooks, and company policies to identify any clauses or language that pertains to noncompete agreements. This review should include not only direct noncompete clauses but also any related provisions that could be impacted by the new laws, such as non-solicitation clauses which can have the same or similar effect as a noncompete clause, ensuring a comprehensive understanding of current contractual obligations.
- Legal Consultation for Contract Revisions: Moving forward, employment agreements should be revised to eliminate noncompete provisions, ensuring they align with the current legal requirements. Reach out to our team at Adams Corporate Law to ensure that updates not only remove noncompete clauses but also adjust any related contract terms in a manner that is legally sound and reflective of your company's operational needs.
- Notify Affected Individuals: Businesses must issue notifications to both current and former employees regarding the invalidation of noncompete agreements. Additionally, businesses should document these communications for legal compliance and future reference.
- Implement Compliance Training for Management: Training is essential for HR personnel and management on the new legal requirements and how they affect hiring, contract negotiations, and employee relations. This training should cover the nuances of the legislation, including the distinction between allowable contractual provisions (such as protection of confidential information and trade secrets) and prohibited noncompete clauses.
- Explore and Implement Alternative Protective Measures: In place of noncompete agreements, businesses should explore alternative legal mechanisms to protect proprietary information through confidentiality agreements and maintain competitive advantage through long term compensation incentives. Each alternative should be carefully tailored to comply with California law while effectively safeguarding the company's interests.
Comprehensive Legal Guidance on California's Noncompete Laws for All Businesses Operating in the State
The enactment of California's laws on noncompete agreements requires businesses operating in the Golden State to strategically reassess their employment contracts and competition strategies. To navigate these updates and guarantee your business practices comply with the new regulations, contact Adams Corporate Law at (714) 619-9360. Our team is poised to provide the essential support your business needs to adeptly adjust to the new legal framework.