California’s state law does not allow non-compete agreements, or NCAs. Attorney General Bonta issued a press release in March 2022 reminding workers and employers that they cannot be required to sign non-compete agreements or follow non-compete agreements that were already signed. Employers cannot fire employees who refuse to sign a non-compete agreement. This protects employees from being forced to work for a competitor.
What does a non-compete agreement typically mandate?
Employers love non-compete agreements. They can gain financial benefits by ensuring that employees don’t share their intellectual property (IP). California law recognizes that employees may be unable to work for their own livelihood if they are subject to a restrictive contract.
A non-compete agreement, or clause in a contract, is generally a legal agreement that prohibits employees, contractors, consultants, and others from entering into any type of competition. After the employment period has ended, the employee is prohibited from competing with the previous employer. This agreement also prohibits employees to reveal any trade secrets or information relating to the company outside of their employment period.
These contracts usually specify the time period for which an employee cannot work with a competitor. If there is no end date, however, a noncompete agreement could prevent an employee from working with any competitor once their employment ends. This applies regardless of whether they resigned or were terminated.
These are the main pieces of information in non-compete agreements:
- Names and addresses of all parties
- Effective date of the Agreement
- Scope of the agreement
- The agreement affects geographic areas
- Terms and conditions for compensation
- Signatures by both parties agreeing to date
- For more information, see attachments and exhibits
It is dependent on the jurisdiction that non-compete agreements are valid and enforced. Even in states that non-competes may be legal for employers, laws generally recognize the possibility of NCAs putting undue restrictions on employees from being able to gainfully employ them. There are many details in the laws regarding what constitutes an unreasonable burden. A signed NCA might not be legal depending on which laws apply to that particular jurisdiction.
Proper Use of Non-Compete Agreements in California
California has three exceptions to the rule that non-compete agreements can be enforced. Here are some examples:
- Business Sales –A contract may prohibit a seller from opening another business in the same area as the one they are selling.
- Limited Liability Companies – A non-compete agreement can be enforced if a shareholder of a limited liability company wants to sell or dispose off all its shares.
- Partnerships A non-compete agreement can be drawn and enforced if a partnership is disbanded.
Trade Secrets
California employers have no protection against misappropriation or theft of trade secrets. The court must be convinced:
- Trade secrets are “found to derive independent financial value”. Exposure to competitors or the general public could pose a risk to the company.
- The trade secret owner made every effort to keep the information confidential from the public.
Summarized from an article by Stone & Sallus LLP.
