Understanding California’s Ban on Non-Compete Agreements

Non-compete agreements are a common feature of employment contracts across the country. These provisions typically restrict an employee’s ability to work for a competitor or start a competing business after leaving their current job.

But in California, non-compete agreements are generally unenforceable—with limited exceptions. The Golden State has a strong public policy in favor of employee mobility and open competition. Here’s what you should know about California’s ban on non-competes.

The Legal Basis for the Ban

California’s prohibition on non-compete agreements stems from California Business and Professions Code Section 16600. The statute provides:

“Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

This law essentially voids any contract that restricts someone’s ability to work in their chosen profession. It applies not only to employees but also to independent contractors and other business relationships.

The policy behind the ban is to promote competition and employee mobility. California courts have recognized that employee mobility is important for the state’s economy and that non-competes can unfairly restrict workers’ ability to make a living.

Narrow Exceptions to the Rule

There are a few limited exceptions to California’s general prohibition on non-compete agreements. These include:

1. Sale of business: A person who sells the goodwill of a business, or all of their ownership interest in a business, may agree with the buyer not to compete with the business in a specified geographic area. This allows the buyer to protect their investment.
2. Dissolution of partnership: Partners may agree not to compete with each other upon or in anticipation of the dissolution of the partnership.
3. Dissolution of limited liability company: Members of a limited liability company may agree not to compete with each other upon or in anticipation of the dissolution of the company.

These exceptions are narrowly construed and only apply in specific circumstances. In most employment relationships, non-compete agreements will be void and unenforceable.

Trade Secrets and Confidentiality

While California law prohibits non-compete agreements, employers can still protect their trade secrets and confidential information. It’s lawful to require employees to sign nondisclosure or confidentiality agreements that prevent them from sharing proprietary information.

However, these agreements must be carefully drafted to avoid overreaching. They cannot be so broad as to effectively prevent an employee from working in their field entirely. And they cannot restrict an employee from using general knowledge and skills gained on the job.

Employers who try to use overbroad confidentiality agreements to get around the non-compete ban may still face legal consequences. California courts will closely scrutinize any agreement that looks like a non-compete in disguise.

Consequences of Violating the Ban

An employer who requires employees to sign an unlawful non-compete agreement can face significant penalties. Potential consequences include:

• The non-compete will be void and unenforceable
• The employer may be liable for the employee’s attorneys’ fees if the employee successfully challenges the agreement
• The employer may face civil penalties under California’s Unfair Competition Law
• In extreme cases, an employer could be criminally prosecuted for violating the ban

Employees who are fired or retaliated against for refusing to sign an invalid non-compete may also have a claim for wrongful termination in violation of public policy. They may be entitled to damages, including lost wages and benefits.

What to Do if You’re Asked to Sign a Non-Compete

If your employer asks you to sign a non-compete agreement in California, you have options. You can:

• Refuse to sign the agreement and explain that it’s unenforceable under California law
• Ask your employer to remove the non-compete provision from your contract
• Consult with an employment lawyer about your rights and potential remedies

An experienced attorney can review the agreement, assess its validity, and advise you on how to protect your interests. They can also help you negotiate with your employer to remove or narrow any unlawful restrictions.

Protecting Your Right to Compete

California’s ban on non-compete agreements is an important protection for workers in the state. It ensures that employees have the freedom to change jobs, start their own businesses, and engage in fair competition.

If you’re facing a non-compete dispute with your current or former employer, know that you have rights. At TONG LAW, we’re committed to helping employees navigate these complex issues and safeguard their livelihoods.

Contact us today for a confidential consultation, and let us help you understand your options. Don’t let an unlawful non-compete hold you back.