Non Compete California: Everything You Need to Know
Non compete California laws are unique, and are structured differently than they are in the rest of the country.8 min read
Non Compete California
Non compete California laws are unique, and are structured differently than they are in the rest of the country.
The state of California is not only massive in geographic size, but it has a tremendous and undeniable impact on the country’s economy and financial strata, and has the sixth largest economy on the planet, surpassing the entire nation of France last year.
Many companies and business owners argue that California’s laws shouldn’t apply to their businesses or properties because their businesses are headquartered out-of-state, in areas with very different non-compete laws. California courts disagree with this analysis, and for that reason, non compete laws in the state are quite complex.
Companies have attempted to disavow the ban, using “choice of law” provisions that state the contracts entered upon by the state of California and its business operators should be interpreted in accordance with other state laws, usually a state where a business operating in California has its headquarters, and usually in a state that recognizes non-compete agreements. California, again, disagrees with these analysis, and still refuse to enforce non-compete agreements of any kind, with extremely small and situationally-based circumstances.
Some companies, frustrated with the state’s laws, attempt to adopt what are known as “Garden Leave” policies. These policies require high-level employees to give extra extended periods of written or verbal notice prior to their voluntarily resigning or separating from their employment. Instead of the nationally-recognized “two weeks notice” platform, the Garden Leave policies requisite any employees leaving their jobs to attempt to furnish some sort of notice anywhere between 90-180 days prior to their leave. These employees can be told to stay home and “tend to their gardens” while receiving full benefits, and full pay.
In summation, both the state legislature, and the state courts, have wised up to the many creative tricks, tactics, and underhanded techniques businesses often use to skirt non compete laws. The courts refuse to waiver, and vow to continue to fight the enforcement of any non compete laws in the state of California.
California’s Ban on Non-Compete Agreements
The state will not enforce them against former employees, either. The state has gone so far as to wholly reject the “inevitable disclosure doctrine,” which means that non-compete agreements cannot be enforced, even to prevent someone from taking a position based on the grounds of a former employee’s reasonable belief that a former employee will use one or more prior confidences (or trade secrets learned), as a means of securing new employment. In other words, if an employee takes a position with employer A, and learns their secrets, that employee can then take a position with employer B, taking with them any knowledge they learned with employer A along the way. This is typical and true of normal skills, but in the realm of intellectual property, it can cause worry for business owners.
Companies have no other recourse than to simply wait patiently for any violations or instances of law breaking to arise. The burden of proof is also on them -- they must legally prove that a former employee misused or abused confidential information in any way. If a former employee reveals confidential information to a new employer, the former employer has no means of finding out unless that information surfaces naturally.
This is viewed by many as an “anti-business” issue, particularly by business owners who feel the state of California is not doing enough to protect their rights to keep trade secrets a secret, though the policies are based on sound reasoning. Given the size, and importance of California’s economy, their labor laws and workplace policies are arguably very “pro business.”
The state posits that these policies and laws are meant to protect employees, individuals, families, and others in the state of California. The laws help keep people gainfully employed, and the state views non-compete clauses as a potential hamper on workforce productivity. Without such fluid mobility in the workforce in the state of California, there would likely be more individuals on the welfare service rolls, as would there be an increase in people seeking social services from the state.
California is famous to outlawing these non-compete agreements. They’re one of the few states who prohibit any unlawful restraint of an individual’s profession, business, company, or company property, with limited and circumstantial exceptions.
Knowing how best to navigate the very limited exceptions is not only critical, but of extremely high interest and importance to employers in the state who utilize employee/employer agreements in order to protect their trade secrets, intellectual property, and other business assets.
These non-compete clauses wholly forbid employees who become terminated, or voluntarily resign from an employer, from working for any competitors or starting a business that directly competes with the entity or entities that provided them with trade secrets.
According to some estimates, upwards of 20% of workers in the United States are bound by a non-compete agreement of some kind. 14% of those individuals make $40,000 per year or less.
The Obama administration wanted to ban these agreements entirely, and issued a call to action for businesses and individuals to stoke competition, and give better rights to employees across the country. The administration hoped this would lead to fast wage growth and economic mobility.
The White House’s chief economic advisor at the time said, "If you have less of an ability to threaten to leave one job for a better job then you have less of an ability to earn.” The White House’s position reflects laws found in few states, though they are right in line with the courts of California on this issue, for most intents and purposes.
Individual freedoms are important to consider. Finding better, more gainful employment without the need for relocation is crucial to a person’s well-being, personal fulfilment, and is in the best interest of the employee, prospective new employers, and the state economy at large. Employees who are out of work need the fastest path towards becoming employed again, which means, in the eyes of the state, striking down any clauses or legislation that could prevent people en masse from rejoining California’s workforce.
Switching jobs, furthermore, allows people who are stagnant in their earnings to matriculate into better positions that more accurately reflect their potential value to employers, which, in turn, encourages employees statewide to develop new skills, interests, and careers. This spins the wheel, figuratively speaking, of a robust and diverse state economy -- one that is now larger than France’s.
Unenforceability only applies to limitations on one’s employment
These clauses protect and foster a sort of on-the-job training regiment. The restrictions placed on employee mobility by these clauses may present difficulties for free market advocates.
One crucial element of a flourishing, healthy free market is competition. That’s one of the very pillars of our nation’s economy. The labor market reflects this, as well. Non-compete clauses restrict competition in many ways. Looking at the issue from another angle, the ability for employers to write private, enforceable contracts, including ones that bind their workers to secrecy, thus protecting the business or company’s long-term interests, is rooted in free trade ideology.
Without further study, it’s impossible to determine whether or not these non-compete clauses do more harm than good in the context of a free market economy. There is evidence, however, to support the idea that these clauses reduce worker mobility, and force people to remain employed with employers longer than they normally would be.
The workers who become locked-in at one employer earn less than they would in other states or if they were not bound by any non-compete clauses. Evidence also supports the notion that firms and businesses invest more into research and development when their investments are well-protected by non-compete clauses.
This also means that employees and workers who are bound by these clauses also invest less in training, and self-development. This, combined with the behavior of businesses, means that there is a palpable and measurable impact on state economies made by the presence of non-compete clauses.
Restraints on worker mobility, flatly put, reduce a company’s investments in human capital. Nobody should be surprised by the fact that non-compete clauses are thought of by some as innovation-killers.
California businesses are tasked with preventing their employees from leaving and working for competitors, or starting businesses that directly compete with the employer. Many businesses therefore require their employees to sign employment contracts which contain conditional, post-employment non-compete clauses meant to bind employees to secrecy.
Employers are typically unaware or nonchalant about the fact that such clauses are not enforceable in the state of California. Many consider the state’s agreements to restrict any legislation that limits mobility and competition to be a fundamental part of the way the state does business so effectively.
To reiterate, non-compete agreements of any form, with extremely small exception, are illegal, and are not to be tendered under California state law. Employees and independent contractors especially are not bound by the terms of any non-compete clauses they may have signed as a condition of employment.
There are three general types of non-compete clauses. The first is known as a true non compete, and denotes a situation where employees cannot work anywhere where they would have to, as a necessity of employment at another business, reveal trade secrets of their previous employers. The others are known as non-solicitation of customers restrictions, and a non-solicitation of employees restriction.
In the state of California, non-compete agreements that seek to prohibit employees from obtaining gainful employment are null and void, however, the ban only applies to non compete clauses that are effective after termination of employment.
A company can, for perfectly good and legal reasons, prevent employees from freelancing or moonlighting for other business entities during the term of their employment. This is especially true if the moonlighting in question would be performed for a direct competitor of the original, primary employer.
There are a number of valid reasons as to why a company would demand their employees to be loyal, and “team players.” In fact, it’s in the best interest of any business to fill their staff with employees and team members who are happy to be a part of that business. California courts agree that a business’s attempts to monopolize any employee’s commitment to their own venture, particularly where minimizing the risk of corporate espionage is concerned, is vital to their operation.
A lot of businesses find these policies to be readily shareable with prospective employees and applicants prior to making offers of employment. Most companies, in their clauses, insert provisions and restrictions to moonlighting in their employee handbooks. This serves as a reminder to current employees.
Some courts have extended various protections in the state of California meant to help out-of-state employees who intend to become California employees do so. Any employers that use litigation strategically to threaten any noncompete clauses for anticompetitive purposes is breaking state law, and risks exposure to liabilities for operating their businesses outside of the terms of legally binding agreements they have with the state of California. These are unfair business practices in the eyes of California.
There are small exceptions to these rules, however. If someone buys a company, they can prevent the seller, legally, from directly competing with it in the future. In an example, if an individual buys a pizza parlor from another individual, the seller is not allowed, should the buyer choose to pursue these legal restrictions, to turn around and open another pizza parlor that would directly compete with the business he or she just sold.
This is an exception that is rare, but is rooted in common sense and best business practices. California, given its size and importance to the United States economy, strives to implement policies that have a markedly positive impact on the state’s financial health.
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