After spending months, even years, investing valuable time and resources into training and honing the skills of your employees, you understandably do not want a competitor benefiting from the development of those skills and knowledge. In California, employers face an uphill battle as they struggle to prevent former employees from taking their valuable information and technology to another competitor or opening a competing business.
The bad news is that California prohibits virtually all non-compete agreements, with a narrow exception for persons who hold an ownership interest in the business or its goodwill. However, the goal of the non-compete provision can still be achieved.
A relatively new concept, “garden leave,” has been gaining traction in the United States, including California, in the last few years. A garden leave provision typically provides that for the payment of additional compensation, the employee agrees to either:
- stay at home in lieu of finding new employment, or
- assist the employer during a transition period when the employer trains a replacement or takes other measures, i.e. phases out the position.
Typically, the duration of this transition period is short—between three to six months. The former employee will either:
- receive a lump sum payment, generally equivalent to his or her salary during this transitional period, or
- will continue on the payroll and receive benefits during the transition period.
It is crucial to clarify both to the employee and in the agreement that this additional payment applies exclusively to the limited transition period and is not a part of any standard compensation or severance package paid as part of the regular employment agreement.
While garden leave has received mixed results in California, the courts have generally upheld such provisions where the work restriction did not extend beyond this short transition period, regardless of any further payment.
Confidentiality Provisions and Non-Disclosure Agreements Can Achieve the Same Goal
While a non-compete provision remains unenforceable in California, you can take measures to protect your confidential information and trade secrets that achieve the same goal. While there are exceptions to the rules preventing disclosure of confidential information and trade secrets – such as the information is already known to the public or disclosed by a third party – these provisions effectively prevent an employee from sharing your protected information with a new employer or using it to start a new business.
The confidential information and trade secrets covered by such a provision or agreement, for purposes of a bootstrapped non-compete provision, should identify specific categories of your information, as opposed to an umbrella provision that encompasses all possible types of protectable information. Examples of specific types of protectable information may include personal and financial customer data, vendor information, business methods and processes, source code, research and product development and the like.
Garden leave provisions tend to be limited to employment agreements with company executives and high level employees, as it would become costly to pay every employee to sit at home for a few months after terminating employment. Further, compensation for garden leave must be more than a token payment. There must be sufficient additional compensation exchanged for the employee giving up the right to look for new employment, particularly in fields where a few months out of work can make the employee obsolete in the field. If the court finds the additional payment to be a mere token payment, the provision will be void as an unenforceable non-compete provision and you could find yourself on the wrong end of a lawsuit.
At the end of the day, you do not need to restrict an employee’s right to work in a chosen field to achieve the goal of protecting your confidential information and intellectual property. By effectively utilizing other legal tools, such as including a confidentiality provision in the employment agreement or having the employee sign a non-disclosure agreement, you effectively limit the information the former employee may share with a new employer and create legal liability for any new employer that uses your protected information.