California Labor Rules to Ignore at Your Own Peril – 3rd Rule: Non-Compete Agreements

This is an ongoing series looking at the nine California Labor Rules to Ignore at Your Own Peril. Today we’ll discuss Non-Compete.

Call them what you like: non-compete covenants, agreements, and clause are virtually never valid in California, and haven’t been for 130 years. Despite them being forbidden by law, a number of companies continue to use them; if the employee takes legal action after signing one, it may lead to penalties against the business.

The California Civil Code has expressly forbidden non-compete agreements since it was first passed in 1872. The Business and Professions Code § 16600 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.” Employers cannot require their employees to agree that they will not take a job with a competitor, no matter how narrowly they define the non-compete clause, including within a set period of time or specified geographic area; former employees are also free to seek jobs with the clients of their former employer. This was most recently affirmed in a 2008 California Supreme Court case, Edwards v Arthur Anderson, in which the judges found that such agreements are “null and void” under the law.

Trade secrets, including customer lists, are given some protection, but it’s a thin layer at best. While an agreement not to solicit business from the company’s clients for a specified period of time after leaving is enforceable, your former employee is still permitted to advise them that he or she has left, and may conduct business should your client initiate the contact.

Some narrow exceptions to the non-compete rules do exist; they always involve the selling of an ownership interest in the company, and are laid out in § 16600 of the law. However, courts are wise to the use of sham agreements designed to trigger this exception; it only counts if a substantial interest in the company is being transferred, so that the “goodwill” of the business is included. For example, requiring employees to purchase a single share of stock, and to sell it upon leaving, would not make a non-compete agreement legal in California.

This is not a right which employees are permitted to waive, so getting staff to agree to such agreements does not make them valid. While some employers will make the business decision to execute non-compete covenants despite the longstanding laws forbidding them, such agreements will only be effective unless and until the employee realizes differently. How much of a deterrent such agreements are in California depends solely upon the ignorance of the employees signing them, which is a very thin defense. In fact, if a company refuses to hire someone, or terminates them, because they do not sign such an agreement, they can be sued for wrongful termination. Rather than getting entangled in such litigation, some employees may choose to sign the document, knowing it carries no legal weight.

California labor laws are, as this example illustrates, complex and written largely for the benefit of the employee. PACIFIC DATA Marketing can help companies negotiate the labyrinthine regulations and come out on top; contact us for more information.

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