Why California Executives Can’t Afford to Ignore Non-Compete Agreements
Across America, almost 30 million workers have signed non-compete agreements as a condition of their employment.
The purpose of these agreements is to protect trade secrets, confidential customer information, or intellectual property from competitors. They do this typically by placing restrictions on when and where certain high-level or technically skilled employees can retain work.
But in the past few decades, employers have increasingly required more and more workers to sign these agreements as a matter of course — even when they may not pose a legitimate risk to an enterprise’s legally protected proprietary assets.
In many states, including California, non-compete agreements are unlawful, but many employers still pressure workers to sign them.
A 2019 Economic Policy Institute study revealed that 45% of California businesses surveyed subject some of their employees to non-compete agreements.
How is this possible? Employees are often intimidated by these restrictions, don’t understand how to challenge their employers in court, or may not even realize that non-compete agreements are illegal.
Let’s walk through the restrictions that non-compete agreements put on employees, how these agreements are handled under California law, and what you should do if you’re facing an invalid non-compete agreement.
If you have questions about non-compete agreements, please contact the experienced California employment lawyers at Ottinger Employment Lawyers today.
What is a Non-Compete Agreement?
California law provides that any contract restraining someone from engaging in a lawful profession, trade, or business of any kind is void, subject to a few exceptions. In other words, in California, non-compete agreements are not enforceable.
Unlike most other states, non-compete agreements are unenforceable in California. Under California law, a non-compete agreement cannot be used to protect confidential company information. Instead, employers must turn to other ways to protect confidential information and trade secrets.
Employees could be prohibited from starting a new position for six to twelve months after they leave their previous job. Or, they could be banned from working with other companies in the same industry that are located within 50 miles of their previous employer’s main site of business.
These agreements are generally found in employment contracts. But, they could also appear as a separate document an employer requires as a condition of employment.
They’re sometimes linked to other restrictive clauses, like non-disclosure agreements, or non-solicitation agreements.
A Brief History of Non-Competes
Historically, non-compete agreements were reserved for top-tier executives or individuals working in highly technical roles. E.g., individuals with access to confidential information or who had a hand in the research and development of business-critical intellectual property.
Non-compete agreements helped businesses protect their assets by preventing employees from taking critical skills and information to competitors.
But in the past two decades, it’s become more and more common for employers to present non-compete agreements to employees who would not normally have signed them in the past. This includes mid-level executives, managers, and even lower-skilled, waged workers.
A 2019 study estimates that 53% of American workers bound to non-compete agreements are non-salaried — and 14% of them make less than $40,000 a year.
These restrictions can be crippling for individual workers’ career aspirations and earning potential. By preventing workers from seeking competitive pay and opportunities, non-compete agreements contribute to wage stagnation and further entrench pay inequalities.
The Economic Policy Institute’s 2019 study shows that the limitations that non-compete agreements place on worker mobility also have a negative impact on the economy as a whole. This is because they restrict opportunities for innovation and growth that come with workers’ freedom to seek competitive opportunities.
What is California’s Policy on Non-Compete Agreements?
Because of the growing criticism of the negative impact that non-compete agreements have on worker mobility and the economy, many states — like North Dakota, Oklahoma, and recently Washington D.C. — have banned or severely limited their enforcement.
In California, it’s illegal to enforce non-compete agreements that put limits on an employee’s future job prospects.
According to California Business and Professions Code Section 16600, any contract that restricts an individual from “engaging in a lawful profession, trade, or business” is null and void.
State labor law only makes exceptions to this ban on non-compete agreements in very specific cases. For example, when a business is being sold, or an LLC is being dissolved.
But when it comes to the bulk of the circumstances where non-compete agreements arise (as contracts between a business and an individual employee), the law is simple and clear: a company can’t prevent you from working in a certain geographic area, for a period of time, or for a competitor.
What If the Company is Based Outside of California?
Importantly, this ban on non-compete agreements protects individuals who work in California even if your company is based in another state where non-compete agreements are legal.
Many businesses who employ individuals living in different states include what are called “choice of law” provisions in their employment contracts. These clauses specify that any potential dispute must be adjudicated in the state where the contract was signed.
So, if you’re an executive who lives in California but signed an employment agreement for a New York-based company, you may have technically consented to the application of New York law (which allows non-compete agreements) in any future suits.
But according to California Labor Code Section 925, that clause would be invalid. If you primarily live and work in the state, California law must be applied in any lawsuits that arise between you and your employer.
Your company can’t enforce any agreement that would deprive you of the protections of California labor law to adjudicate a suit in a different state.
Three Exceptions To a California Non-Compete to Consider
Non-competes can be permitted under three exceptions.
Exception #1: If the employee sells business goodwill.
Exception #2: If the business owner sells their business interest.
Exception #3: If the business owner sells all operating and goodwill assets.
What to Do if You’ve Signed a Non-Compete Agreement in California
Unfortunately, even though non-compete agreements are banned under California law, many companies still present them or try to coerce workers into signing them.
These agreements are sometimes included in the fine print of employment contracts, where workers can easily overlook them. Even if an employee is aware they’re signing one, they may feel resigned to obeying its restrictions due to employer pressure or fear of potential legal consequences.
California employees can report an employer to the California Attorney General’s office if they request you to sign a non-compete agreement as a condition of your employment.
Companies issuing illegal non-compete agreements can be subject to legal penalties, often in the form of fines.
An employer might still threaten to sue a worker who doesn’t comply with their non-compete agreement, say, by taking a job with a competing business.
However, unless your situation falls into one of the previously mentioned exceptions laid out by California law, they don’t have a legitimate case.
Connect with a California Employment Attorney Now for Expert Guidance!
If you’re being sued for breaching a non-compete agreement in California, you should contact an employment attorney immediately and arrange to file a motion to dismiss the case.
You can also seek compensation through a civil lawsuit. If an unlawful non-compete agreement negatively impacted your livelihood, you could be entitled to financial recovery for damages and/or payment of court fees.
An employment attorney can guide you in filing a report or a suit against an employer who has issued an unlawful non-compete agreement.
If you live and work in California and need to dispute a non-compete agreement signed out of state, contact the team at Ottinger Employment Lawyers to discuss your case.
Robert Ottinger, Esq.
Robert Ottinger is an employment attorney who focuses on representing executives and employees in employment disputes. Before starting his firm, Robert slugged it out in courtrooms trying cases for the government. Robert served as a Deputy Attorney General for the California Department of Justice in Los Angeles and then as Assistant Attorney General for the New York Attorney General’s Office in Manhattan.
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