Non-Compete Clauses for Employees Become Radioactive in California

California has for over 80 years prohibited covenants not to compete (also called non-compete clauses) except in a handful of cases. The basic prohibition is in Business & Professions Code § 16600, which provides:

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 statute goes on to provide a list of exceptions, the most important ones of which are an exception for any person who sells the goodwill of a business (sole proprietor) and any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity (shareholder of a corporation, member of an LLC, or partner in a partnership).

But nowhere does the statute expressly permit a non-compete clause for an employee. And the case law has been clear that covenants not to compete by employees are not enforceable. But that hasn’t stopped some employers from putting them in employment agreements and using them (unlawfully) to bully ex-employees into not working for a competitor.

Employers risked having such clauses being deemed an unfair business practice, but the legislature felt that wasn’t enough of a deterrent. In September 2023, the state legislature increased the negative consequences for employers who ask employees to sign covenants not to compete (SB 699). It added section 16600.5 to the Business and Professions Code.

That new section declares that

  • Any covenant not to compete that is void under the Business & Professions Code is unenforceable regardless of where and when the contract was signed.
  • An employer or former employer must not attempt to enforce such a contract regardless of whether the contract was signed and regardless of whether the employment was maintained outside of California.
  • An employer must not include a non-compete clause in a contract with an employee or prospective employee.
  • Any employer that includes a non-compete clause in a contract with an employee or prospective employee or that attempts to enforce a non-compete clause commits a civil violation.
  • An employee, former employee, or prospective employee may sue the employer who has committed such a civil violation for injunctive relief or the recovery of actual damages, or both.

But here is the kicker:

  • An employee, former employee, or prospective employee who prevails in suing an employer for such a civil violation will be entitled to recover reasonable attorney’s fees and costs.

When a statute provides that a plaintiff can recover attorney’s fees and costs, it’s usually a one-way street. If the plaintiff (here, the employee) wins, he or she gets awarded attorney’s fees. If the plaintiff loses, defendant (here, the employer) does not get awarded attorney’s fees. There will be attorneys willing to represent employees on a contingent-fee basis, but of course, companies defending lawsuits typically have to pay their attorneys on an hourly basis.

In addition, in October 2023, the legislature amplified the risks for employers who have non-compete clauses in their employment agreements (AB 1076).

The legislature added section 16600.1 to the Business & Professions Code, which made it express that it is unlawful to include a noncompete clause in an employment contract, or to require an employee to enter a noncompete agreement. Before that was the result by logical implication, but now, no logical reasoning is needed. It is outright declared unlawful.

AB 1076 also imposed a requirement on employers who had previously included a noncompete clause in certain employment agreements to notify employees by February 14, 2024, that that the noncompete clause or noncompete agreement is void. Failure to do so would be an act of unfair competition, which could result in action being taken against the employer.

Yet more attorney’s fees to be incurred by wayward employers!

The take-away:  Don’t include covenants not to compete in employment agreements in California, and if an employer has in the past (foolishly) included non-compete clauses in employment agreements, the employer should notify present and former employees that the noncompete clause is void.

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