California takes non-compete laws seriously, they already had some of the strictest non-compete laws in the country–employers can almost never execute non-compete agreements with employees, regardless of how narrowly they may be tailored. Employers are also expressly forbidden from including choice-of-law provisions in agreements that might allow them to enforce a non-compete in another state. It’s a hard thing to conceive but, recently, Governor Newsom signed two bills restricting non-compete use even further.
What has changed
First, SB 699 voids not only California non-compete agreements, but those executed in other states as well. Second, AB 1076 requires employers to provide notice to current employees and certain ex-employees who are subject to non-compete agreements, or other agreements that impose on employees’ ability to move jobs, that those agreements are void. Further, AB 1076 imposes monetary penalties for employers who violate the non-compete law.
Existing California law says 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.”
Senate Bill 699, effective January 1, 2024, adds a new section to California’s non-compete prohibition stating that “[a]ny contract that is void under this chapter is unenforceable regardless of where and when the contract was signed.” The phrase “regardless of where and when” has struck a chord with many employers. What this means is that California is attempting to invalidate contracts that were executed and fulfilled entirely in other states–even states where non-competes are permitted. Employers and their employees could have signed a valid non-compete agreement, performed all contract requirements, and finalized their employment relationship outside of California but their agreement would be invalid if the employee simply moved to California. It’s likely that this law will be challenged, but, for now, even out-of-state non-compete agreements are void and unenforceable in California.
On October 13, 2023, California’s antipathy towards non-competes evolved a step further when Governor Newsom signed AB 1076. This new bill requires employers to provide notice to their employees that any non-compete agreement they may be subject to is void. Further, the bill states that any violation of the non-compete law constitutes an act of unfair competition, which can carry with it a penalty of $2,500 per violation.
This new notice requirement coupled with SB 699 understandably brings up some complicated questions for employers. Let’s address several common questions employers have about the new law:
- What counts as a non-compete agreement?
- The new law is likely to apply to more agreements that just traditional non-competes. California courts have expansively interpreted the restriction against unfair competition to apply not only to traditional non-compete agreements, but also to other restrictive covenants like non-solicitation agreements and overly-broad confidentiality agreements. If your agreement would restrain your employee from getting a new job, you will need to send notice that the agreement is void.
- Who do I have to send this notice to?
- Once you determine what agreements you have that will require notice to be sent out, you will need to evaluate which people need to receive that notice. SB 1076 requires that employers provide notice to all current employees and former employees “who were employed after January 1, 2022, whose contracts include a noncompete clause, or who were required to enter a noncompete agreement” unless they were subject to one of the few exceptions in the statute.
- Further complicating matters is California’s new law, discussed above, that voids non-competes executed outside of the state. Because this requirement is so new and unprecedented, its reach is unclear. Risk-averse employers should consider sending the notice to California employees who signed non-compete agreements, non-solicitation agreements, or broad confidentiality agreements that would prohibit them from getting a new job. Also unclear is whether the law requires California-based employers to send the notice to employees outside of California whose restrictive covenants have been executed and maintained entirely outside the state. If you are unsure of your situation or whether to send a notice of a void restrictive covenant, consider consulting an attorney.
- What does the notice have to include?
- The law only states that employers must “notify the employee that the non-compete clause or non-compete agreement is void,” without other guidance. It’s a good practice to include as much information for the recipient as possible, though. Things like dates, agreement titles, and section numbers will help employees find the specific clauses or provisions being referenced. Including that type of information could be useful to provide to a court if ever there is a conflict.
- Where do I send the notice?
- Notice must be sent to the employee or former employee in two ways; it must be sent to their last known physical address and email address.
- When do I have to send it?
- This new notice must be sent by February 14, 2024, at the latest.
While employers do have some time to send out notices and get everything in order, an important thing to remember is that AB 1076 takes effect January 1, 2024, and imposes penalties for violations of any part of the non-compete law. Employers should review any form agreements they use that might contain unlawful restrictive covenants. By including those provisions, even if they are never enforced, employers discourage employees from seeking or accepting other employment they would otherwise be free to take. Those agreements therefore violate the law.
In addition to reviewing their form agreements, employers need to determine which current employees and former employees hired after January 1, 2022 are subject to an agreement that might require notice. Finally, employers need to find those former employees’ last known physical and email addresses and send an individualized notice to both those addresses.
SixFifty Can Help
If you are unsure what to include in your notice, we’ve included a California Non-Compete Notice tool and added it to the employment policies in Employment Docs. It helps employers create individualized notices for each employee who needs to receive one. Our tool will ask a few questions about the employee and the specific contract being referenced so that the notice is as comprehensive as possible. If your agreements need updating in light of these updates, we have the tools to help. As always, when new laws pass we update our tools so your documents are always up to date.
If you’d like to make informed decisions around hiring in new states and ensure compliance in a rapidly changing landscape, schedule a demo with SixFifty today.