With few very limited exceptions, California has long prohibited California employers from entering into “non-compete agreements” with their workers, and the restrictions have long applied to employees who work in the State of California. California has now enacted a new law prohibiting California businesses from entering into noncompete arrangements with their employees, regardless of where or when that arrangement is entered into.
The new law prohibits a California employer from entering into a noncompete agreement or clause with anyone who works outside California, even if the state in which the employee works does not ban or severely restrict noncompete agreements. The new law is effective now, meaning that California employers may not seek to enforce such arrangements with out-of-state workers, and any such existing agreements are void.
Further, by February 14, 2024, California employers must notify all current and former employees employed after January 1, 2022, who entered into a non-compete arrangement with the employer, that such agreements are void. Notice must be an individualized written communication to each such employee.
If your business is seeking to enforce a noncompete agreement with out-of-state workers or has existing noncompete agreements with out-of-state workers, contact counsel to seek alternative ways to protect your business’s proprietary information.
What is a non-compete agreement?
A non-compete clause or agreement is generally a clause that prohibits workers from competing with their employer after the termination or end of the workers’ employment or provision of services to the employer. Noncompete arrangements typically restrict the worker from competing with the employer for a set period following the end of employment and within a set geographical area. Noncompete arrangements may also take the form of non-solicitation of the employer’s customers or clients after the end of the worker’s employment or the cessation of services.
What purpose does the non-compete serve for employers?
In other states, where noncompete arrangements are not unlawful or subject to fewer restrictions, employers have successfully used noncompete agreements or clauses to protect their confidential and proprietary information as well as their relationships with customers or clients. Employers, for example, may invest significant time and resources into training employees on its business practices, including its proprietary information, or into introducing their employees to the employers’ customers and assisting employees in their development of customer relationships. A noncompete agreement significantly helps an employer protect those assets.
What are the types of restrictions imposed on noncompete arrangements, and why have they been imposed?
California’s longstanding prohibition is a ban on noncompete agreements except in very limited circumstances (i.e., restricting an owner from competing after the owner sells the business). The California legislature has stated that the purpose of the strict prohibition is to fuel competition, entrepreneurship, innovation, wage and job growth, and to promote equality and economic development.
Multiple other states have restrictions on noncompete agreements. Some such states prohibit employers from entering into noncompete agreements with only non-exempt employees (employees who are non-exempt from the Fair Labor Standards Act’s minimum wage requirements) or with employees paid below a set wage threshold.
Without the ability to enforce a noncompete agreement with out-of-state workers, even if the noncompete agreement is otherwise lawful in the state in which the workers are employed, what can California employers do to protect their proprietary information?
The new California law prohibiting California employers from entering into noncompete agreements with out-of-state workers does not apply to restrictive covenants protecting a business’s confidential and proprietary information. Therefore, while a California employer cannot prohibit an out-of-state worker from taking a job with a competitor upon the termination of employment, California businesses may still prohibit that employee from disclosing or using the California employer’s confidential information with the employee’s next employer.
It is strongly recommended that California businesses review and revise, if necessary, any restrictive covenants in agreements with out-of-state workers and take steps as soon as possible to comply with the new California law. Contact us for the best practices on how to do so.
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If you have questions about noncompete agreements or other labor and employment matters, please contact our Labor and Employment department at 408.286.5800 or eileen.kennedy@berliner.com.
This article is not intended to and does not constitute legal advice or a solicitation for the formation of an attorney-client relationship. Anyone with questions about this topic should consult an attorney.