December 5, 2023

New California Laws Take Aim at Employee Restrictive Covenants

Despite California’s longstanding policies, statutes, and robust case law in the non-compete arena, the Legislature recently enacted two new provisions seeking to provide further protections against non-compete agreements in the employment context. Failing to comply with these new provisions can have significant consequences, so employers should immediately review their employment agreements and related policies.  

Assembly Bill 1076

It is well known by employers (and many employees) that California has a long-standing public policy against non-compete agreements except in limited circumstances. That public policy is codified in Business and Professions Code Section 16600, which 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.” There are several specific exceptions, usually arising from dissolution or sale of a business.

Assembly Bill (AB) 1076, effective Jan. 1, 2024, attempts to reemphasize the public policy behind Section 16600 and adds a new Business & Professions Code Section 16600.1, which increases the potential consequences for violation of Section 16600.

These new statutory changes to Section 16600 declare that the existing law voiding non-competes shall be read broadly in the employment context and that non-competes are void even if the person being restrained from competing is not a party to the contract. 

The Legislature, however, does not define what constitutes a non-compete. This issue has been and continues to be heavily litigated, and the Legislature appears to be leaving it to courts to make a determination. 

Section 16600.1 adds several new layers to the non-compete landscape:

  • It is now unlawful to include a non-compete in an employment contract or a standalone non-compete agreement.
  • A violation of the prohibition on non-compete agreements also constitutes unfair competition under California’s Unfair Competition Law, Business & Professions Code Section 17200.
  • It adds an onerous requirement that employers must individually notify (by mail or email) all current employees and any former employees employed after Jan. 1, 2022, in writing, that any agreements they signed that violate Section 16600 are unenforceable. The notice must be provided by Feb. 14, 2024, and failure to provide the notice itself also appears to constitute unfair competition under California’s Unfair Competition Law. 

Senate Bill 699

AB 1076 is not the only legislation targeting employee restrictive covenants that goes into effect in the new year.  Senate Bill (SB) 699 creates new Business and Professions Code Section 16600.5, effective Jan. 1, 2024, and addresses the use and enforcement of non-compete agreements signed outside of California.  SB 699 provides that any contract that violates Section 16600 “is unenforceable regardless of where and when the contract was signed.” It prohibits employers from attempting to enforce a contract “regardless of where the contract was signed” and even if “the employment was maintained outside of California.” As a result, non-California employees who signed non-compete agreements outside of California are supposed to be protected under California law’s non-complete prohibitions should they later seek or gain employment in California. Entering into improper non-compete agreements or attempting to enforce unlawful non-compete agreements is now a “civil violation” under this section. 

While most disputes regarding restrictive covenants have been framed as breach of contract or declaratory relief claims, SB 699 appears to create a new cause of action for employees seeking to challenge a non-compete. The law provides employees challenging improper non-competes can seek injunctive relief, damages, and recover their attorney’s fees via a ”one-way” fee shifting provision in which the employee, but not the employer, is entitled to fees in the event that they prevail on a claim under the statute. This is not limited to the out-of-state provisions added by SB 699, but appears to apply to all claims related to violations of Section 16600 and the related statutes, an issue which California courts will need to decide based on interpretation of Legislative intent.

Key Takeaways

AB 1076 marks a nuanced, but significant, change to California’s approach to restrictive covenants, codifying that restraints on employees’ ability to engage in their business or profession are not only void, but unlawful. When combined with SB 699’s specific provisions for a new cause of action with potential attorneys’ fees, employers are now far more likely to face challenges to any potentially offending employment agreement. Section 699’s attorneys’ fee provision appears to incentive employees and their attorneys to litigate these claims vigorously.  

Employers should carefully review their employment agreements with current and former employees to determine whether any of those agreements contain restrictive covenants that could violate Section 16600. In the event employers determine that provisions in agreements with California employees potentially amount to non-compete agreement as interpreted by California law, they should (1) promptly revise their agreements to comply with California law, and (2) prepare written notices to impacted employees in order to comply with AB 1076’s notification requirement within the time parameters required by the new statutory scheme.

With the passage of SB 699, employers nationwide need to be wary of non-compete agreements for workers employed or that later become employed in California. The application of this law to lawfully enacted non-compete provisions in other states will be a point of intrastate contention.  Litigation on this front will be crucial to determine the breadth of California’s reach in the non-compete arena. The ultimate effect of the law may be that California employers can (1) hire California employees without concern that doing so would violate a non-compete agreement executed by those employees outside of California and (2) no longer rely on or seek to enforce non-compete agreements signed by their non-California employees where those employees later choose to work in California in a role that would otherwise violate those agreements.

If you have questions about the new legislation or its applicability to your employment agreements, please contact a Payne & Fears LLP attorney to discuss.