New Restrictions on Non-Compete Clauses: What California Employers Need to Know

Bills recently signed into law in California bolstering the restrictions on non-compete clauses in employment contracts will go into effect on January 1, 2024. Employers likely know that clauses or agreements that limit an employee’s right to work in any industry or profession, including commonly used “non-compete” clauses, are unenforceable in California. This has been codified in State law since 1872.

Recent Changes to the Non-Compete Clause Legislation

Previously, decisions interpreting the non-compete clauses made it clear that they were void but not illegal. There was no penalty for entering into such an agreement with an employee, save that the clause was unenforceable. The new additions to the code will change this.

  • Key Points of the New Rules: The new rules expressly make non-compete clauses and agreements in employment contracts unlawful, subject to a few narrow exceptions to the code. It also requires employers to send notices explaining to current employees or former employees who worked in 2022 or more recently and have or had such a clause in their contract that the clauses in existing contracts are void.
  • Legal Consequences for Non-Compliance: These notices must be individualized communications and must be delivered to the last known mailing address and email address of the current or former employee. Failure to provide these notices will subject the employer to an act of unfair competition within the meaning of Business and Professions Code § 17200.
  • Implications for Contracts Made Outside California: §16600.5 applies the restriction on non-compete clauses to contracts entered outside of California and prohibits an employer subject to California law from enforcing such a clause even if the employment was maintained outside California. The constitutional choice-of-law limits on the application of this section have yet to be tested.

Legal Recourse for Employees

This new section also creates a private cause of action by which a current, former, or prospective employee may bring suit against an employer for violating the new non-compete rules. § 16660.5 does not provide a fixed civil penalty, so an employee would have to show harm due to the clause to collect monetary damages. That said, the mere existence of the clause is now grounds for injunctive relief, and the employee prevailing on such grounds may recover attorney’s fees and costs.

What Employers Should Do Now

Many employers still include non-compete clauses in their standard employment contracts in California because there has previously been no downside to doing so. It is now prudent for employers to review their contracts and consider amending them to exclude any clause that may be regarded as a restraint on trade. Employers may also need to examine the contracts of anyone employed between January 1, 2022, and now to determine whether they need to send the mandated notices to these individuals. The deadline to send the notices is February 14, 2024, so there is little time to delay, especially if one has a large workforce or a high turnover of employees.

Contact JRG Attorneys at Law

If you are an employer who believes this legislation may impact you, we encourage you to reach out to the Business Law team at JRG Attorneys at Law by calling (831) 228-5619. You can also reach our team online right now.