Why You May Have to Comply with California’s New Noncompete Laws – With a February 14 Deadline
Thursday, February 8, 2024

While the enforcement of non-compete clauses (“noncompetes”) varies in jurisdictions across the country, California has a longstanding history of disfavoring them and championing a pro-employee-mobility work environment. Two laws were recently passed – Assembly Bill 1076 and Senate Bill 699 – expanding the scope of California’s prohibition on noncompetes and exposing companies to a heightened risk of liability. Assembly Bill 1076 (“AB 1076”) renders noncompete agreements in California void and implements a notice requirement for current and former employees; and Senate Bill 699 (“SB 699”) entitles employees to new legal remedies. Both laws, summarized below, went into effect on January 1, 2024.

In light of this change, businesses should understand how the laws impact their employment practices and implement strategies to ensure they comply. Moreover, with fewer restrictions on employee mobility post-employment, it is important companies have adequate NDAs and confidentiality agreements in place to protect proprietary information.

Assembly Bill 1076

AB 1076 (1) codifies recent California case law, clarifying that the prohibition on noncompete agreements is broad; and (2) and implements a retroactive notice requirement.

First, AB 1076 renders all noncompete clauses in employment contracts void. The law provides that the prohibition should be interpreted in accordance with Edwards v. Athur Andersen LLP, a California Supreme Court decision, which held that noncompetes are invalid even if they are narrowly drawn. This key decision overturned prior caselaw permitting the enforcement of noncompetes with narrow restraints.

Second, AB 1076 introduces a notice requirement. Under the law, employers must individually inform current and former employees who have or had unlawful noncompetes in their contracts that those provisions are no longer valid. The individualized written notices must be sent by February 14, 2024. This applies to all employees located in California, employed by companies after January 1, 2022, and whose employment agreements contain noncompete clauses, customer non-solicitation clauses, or other unenforceable provisions. Further, the notice must be sent in two ways – to the employee’s last known physical address and the employee’s email address.

Senate Bill 699

Next, SB 699 raises the stakes for employers and underscores California’s public policy against noncompetes. The law amends California Business & Professions Code 16600 to add Section 16600.5 and prohibits employers from entering into or enforcing noncompetes regardless of whether contracts were signed in California. Under the new law, it is a civil violation for employers to enter into or enforce noncompete agreements, subject to extremely limited exceptions which remain unchanged (related to the sale of dissolution of a business).

The drafters stress that the “freedom of movement of persons whom California-based employers wish to employ to provide services in California, regardless of the person’s state of residence” is “paramount to competitive business interests.” In other words, no matter where a person began work, signed their employment contract, or even agreed to a choice-of-law other than California, it does not matter: noncompetes are void for employees working in California.

This change is significant because it means that employees, former employees, and prospective employees each have a private right of action permitting them to bring lawsuits to enforce their rights against companies who may have been including unenforceable noncompetes in employment contracts and not properly notifying the employees pursuant to the new laws. What’s more, under the new framework, plaintiffs are empowered to sue and seek damages, injunctive relief, or both, in addition to reasonable attorneys’ fees. Regardless of where an employment contract is signed, the prohibition applies. For example, if an employee at a non-California company signs a noncompete in another state and relocates to California, the signed noncompete is void under SB 699 and the employee must be notified pursuant to AB 1076. Therefore, this additional ban can impact any company with employees or former employees living in California.

Strategies for Employers

Given the immediate changes impacting business inside and outside of California, employers should take steps to limit the risk of litigation and comply with the laws. All businesses with employees who are California residents should review and revise any employment contracts for all employees hired after January 1, 2024, to make sure they do not include any unlawful provisions. In addition, any language that could be interpreted as a noncompete should be changed. It might even be beneficial to consider adding a disclaimer about the application and enforcement of noncompetes or restrictive covenants in California, whether or not the company has a presence in California.

At the same time, employers should review any materials that could potentially create implied contracts containing restrictive covenants – including employee offer letters, handbooks, and policies. Further, employers should update template employment agreements along with recruitment and hiring practices to remain up to date.

Next, employers should prepare to notify the applicable employees by the impending February 14th deadline. This may require assembling a list of employees subject to the new law. Any noncompliant contracts need to be corrected, and the applicable employees need to be notified. Employees should send written notice of AB 1076 affirming that the company will not enforce any unlawful noncompete agreements by the deadline.

Looking ahead, companies may benefit from implementing systematic notification policies. This can help ensure that human resource departments are informed of all employees who are relocating to California. In addition, as companies undergo these changes, employers will have to adapt to environments where employees have greater mobility. Companies should stay up to date and ensure that the language of NDAs or confidentiality agreements is sufficiently protective of company trade secrets. Lastly, companies may also want to have a document retention policy to retain documents proving compliance with the notice requirements referenced above.

 

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