California: Out-of-State Non-Competes Cannot be Enforced in California
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APPLIES TO All Employers |
EFFECTIVE January 1, 2024
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QUESTIONS? Contact HR On-Call |
Quick Look
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Discussion
SB 699 prohibits employers from entering into or enforcing noncompete agreements in California, regardless of where or when the contract is signed. This means that a noncompete agreement lawfully entered into in another state cannot be enforced in California. This may occur, for example, where an employee leaves an out-of-state company to work for a company in California. The previous employer cannot stop the employee from competing in California, regardless of a valid agreement in another state.
The bill says research shows that noncompete clauses stifle economic development, limit firms’ ability to hire and depress innovation and growth. Noncompete clauses are associated with suppressed wages and exacerbated racial and gender pay gaps, as well as reduced entrepreneurship, job growth, firm entry, and innovation. California’s public policy provides that every contract that restrains anyone from engaging in a lawful profession, trade, or business of any kind is, to that extent, void, except under limited statutory exceptions. California has benefited significantly from this law, fueling competition, entrepreneurship, innovation, job and wage growth, equality, and economic development. The significance of this concept is highlighted by the fact that there were zero “no” votes against the bill. A rare feat in the current political climate.
However, this bill raises a number of questions about its constitutional enforceability. We are likely to see litigation between California and out-of-state companies attempt to resolve this issue.
Additionally, violations of this new bill may potentially be enforced under the Private Attorney General Act (PAGA). PAGA applies to contracts prohibited by law. While noncompete agreements were previously void, soon they will be specifically prohibited by law, including a private right of action to recover injunctive relief, damages, and attorneys’ fees for prevailing plaintiffs. Employers may face significant liability for a violation of the new law.
Action Items
- Review the bill here.
- Review restrictive covenants with legal counsel.
Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser. © 2023 ManagEase