California Enacts the Nail in the Coffin of Non-Compete Agreements

California law makes void any contract “by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind,” including non-compete agreements. (Business & Professions Code § 16600.) Non-compete agreements are enforceable in only three limited circumstances: the sale of a business, the dissolution of a partnership, or the dissolution or termination of interests in a limited liability company.

Nonetheless, according to SB 699’s legislative findings, California employers continue to require employees to sign non-compete agreements, knowing they are unenforceable, which has a “chilling effect on employee mobility.” To halt this behavior, SB 699 expands the prohibition on non-compete agreements by expressly making them unenforceable in the employment context and prohibiting employers from seeking to enforce them, regardless of where and when the agreement was signed. In other words, California employers may not enforce a non-compete agreement with an employee who works in a state where non-compete agreements are otherwise enforceable.

SB 699 also makes it unlawful for employers to even enter into a non-compete agreement with employees, and gives employees a private cause of action against employers who do so. So, even if an employer does not try to enforce a non-compete agreement, an employee may recover damages and attorneys’ fees from an employer just for putting such a clause in an agreement. Also, because non-compete agreements are now “prohibited by law,” requiring employees to sign such agreements is now a violation of Labor Code 432.5 – which is subject to PAGA claims.

Another recently signed bill, AB 1076, requires employers to send written notices to any employees employed after January 1, 2022 (including former employees), that any non-compete clauses or agreements previously reached are void. Employers must send these notices by February 14, 2024.

These bills do not address the enforceability of non-solicitation agreements (prohibiting former employees from “raiding” their former coworkers). Although previously considered enforceable, numerous California courts have called such agreements into question since 2019. In light of these bills and the nationwide trend against non-compete agreements, employers may see an increased risk in challenges to non-solicitation agreements, as well.

These bills are just two of many from the 2023 legislative session that will impact employers. We’re here to help – get prepared for 2024 and join us for our annual California Employee Handbook Update webinar and one of our Annual Employment Law Update sessions!  Click the links for details.