Non-Compete Agreements in California: What Employees Need to Know

Nearly 1 in 5 employees across the U.S. are bound by a non-compete agreement. After much research, the FTC (Federal Trade Commission) has concluded that non-compete agreements hinder economic mobility, thwart entrepreneurship, and cause wage stagnation for all employees.

To combat these issues, on January 5, 2023, the FTC proposed a new regulation that would potentially ban all non-compete agreements for employees across the country. The new regulation would also render all current non-compete agreements unenforceable.

What Is a Non-Compete Agreement?

A non-compete agreement, also known as a restrictive covenant, is a provision in an employment contract where one party agrees not to enter into or start a professional trade in competition with another party. Because non-compete agreements stifle free trade, they have been declared void in California since 1872.

Why Are Non-Compete Agreements Void in California?

The State recognized that in order to promote economic mobility and encourage business growth, employees need to be allowed to move freely in the job market. All contracts that seek to prevent employees from engaging in lawful professions, trades, or businesses are void in California.

Exceptions to California’s Non-Compete Ban

There are, however, a few exceptions to the ban on non-compete agreements. For instance, an agreement to refrain from engaging in a similar business within a specific geographical location is enforceable in California for:

• Former business partners
• A seller of a business
• Former LLC members

To enforce a non-compete provision following the sale of a business entity, the purchase price must include fair value of the seller’s interest in the company’s goodwill.

New California Law: SB 699 and Extended Non-Compete Ban

Recently, California passed SB 699, which will extend the reach of California’s non-compete ban to include those agreements executed outside of California. It will also create civil penalties for employers who continue to present employees with unlawful non-compete agreements.

Non-Compete Agreements Are Illegal in California

It is important to remember that non-compete agreements are not only unenforceable in California, but they are also illegal to present to employees. Beginning January 1, 2024, California employees who are presented with non-compete agreements will be entitled to damages, including attorney’s fees.

Contact TONG LAW for Help with Non-Compete Agreements

If you have been subjected to an illegal non-compete agreement, you have legal options. At TONG LAW, we are experienced at helping employees enforce their rights.