Non-compete clauses have long been a staple in employment contracts. Ultimately, they are designed to prevent employees from joining competitors or starting competing businesses after leaving a job.
Employers have traditionally relied on non-compete clauses to protect trade secrets, client relationships, and proprietary business strategies. In recent years, however, legal challenges and regulatory reforms have dramatically reshaped the world of non-compete enforcement.
California has historically led the charge in restricting non-compete agreements – and so our focus will be on the Golden State’s perspective. In fact, recent and important legislative changes have further solidified California’s ban and extended its reach beyond its borders.
Meanwhile, at the federal level, the Federal Trade Commission (FTC) attempted to impose a nationwide ban, only to face legal challenges that have halted enforcement.
For attorneys advising businesses and employees, understanding the current rules governing non-competes – particularly in California – is critical. This article will explore California’s recent legislative updates, the ongoing federal regulatory battle, and the practical implications for both employers and employees.
California’s strong stance on non-compete agreements
California has long been recognized as the most employee-friendly state when it comes to non-compete agreements. Under Business and Professions Code § 16600, nearly all non-compete clauses in employment contracts are void, with very limited exceptions.
Recent legislative changes have taken this prohibition even further, expanding enforcement mechanisms and extending California’s influence beyond its state borders. Let’s take a look:
Senate Bill 699 (SB 699): Expanding the ban
Effective January 1, 2024, SB 699 significantly strengthened California’s stance by prohibiting not just the enforcement of non-compete agreements, but also their inclusion in employment contracts.
This law is particularly significant because it applies even if an employee signed the agreement while working in another state.
Key provisions of SB 699:
- Applies to all non-compete agreements, regardless of where or when they were signed.
- Prevents out-of-state employers from enforcing non-competes against employees who work in California.
- Creates a private right of action, allowing employees to sue employers who attempt to enforce non-compete clauses.
- Provides for injunctive relief, damages, and attorney’s fees for employees who successfully challenge a non-compete agreement.
At the end of the day, this expansion means that any employer with California-based employees – regardless of where the company is headquartered – must ensure compliance with California law.
Assembly Bill 1076 (AB 1076): Employer notification requirements
While California law has long invalidated non-competes, many employers continued to include them in contracts, relying on employee ignorance or legal intimidation to maintain control. To counter this, AB 1076 introduced a new notification requirement to ensure employees know their rights.
Key provisions of AB 1076:
- Employers must notify employees in writing that any non-compete agreement they signed is void.
- This requirement applies to both current and former employees who were employed after January 1, 2022.
- The deadline for compliance was February 14, 2024.
- Employers who fail to comply may face civil penalties and potential class action lawsuits.
By requiring employers to actively inform employees that non-compete clauses are unenforceable, California is taking an aggressive stance against workplace restrictions, ensuring that businesses can no longer rely on outdated or unlawful agreements.
Federal developments and legal challenges
At the federal level, the Federal Trade Commission (FTC) took bold action in April 2024 by finalizing a rule that would ban nearly all non-compete agreements in the United States. The FTC justified this move by arguing that non-compete agreements suppress wages by limiting workers’ ability to switch jobs, reduce entrepreneurship by preventing employees from starting competing businesses, and hurt economic growth by restricting the free movement of skilled workers.
Under the FTC’s proposed rule, nearly all existing non-compete agreements would have been rendered unenforceable.
Legal challenges: The Texas Court ruling
Despite the FTC’s efforts, the rule quickly faced legal challenges. In August 2024, a federal judge in Texas struck down the rule, ruling that the FTC exceeded its authority by attempting to regulate employment contracts on such a broad scale.
The judge found the FTC’s authority under the Federal Trade Commission Act insufficient to impose a categorical ban on non-compete agreements. Specifically, the decision labeled the rule “arbitrary and capricious” in that it ignored legitimate employer interests.
As a result, the FTC’s ban is currently unenforceable, though the agency is said to be considering an appeal. The legal battle is far from over, but for now, state laws continue to govern non-compete enforcement, with California leading the charge in banning them outright.
Implications for employers and employees
With California strengthening its already strict stance on non-compete agreements and federal efforts facing legal hurdles, attorneys for both employers and employees are left scrambling to understand the state of the law.
For now, here are some of the strategies you can share with your clients, depending on which side you represent.
What employers need to know
Employers, particularly those with operations in California, must adjust their hiring and contract practices to remain compliant with state and federal regulations.
Employers must remove non-competes from contracts
California has made it clear that even including a non-compete clause in an agreement is unlawful – not just enforcing one. Consequently, employers should immediately review and revise existing contracts to eliminate non-compete clauses and avoid potential liability under SB 699 and AB 1076.
Failure to comply could lead to class action lawsuits, injunctive relief, and significant penalties.
Out-of-state employers must heed California’s reach
Employers outside California cannot enforce non-compete agreements against California-based employees, even if the contract was signed in another state.
SB 699 expands California’s protections beyond state lines, meaning companies with remote workers in California must ensure their employment agreements comply.
Thus, multi-state employers should review their policies to ensure they do not inadvertently apply unenforceable non-compete restrictions to employees working in California.
Consider alternative protective measures
Since non-compete clauses are no longer an option in California, employers must explore alternative ways to safeguard their business interests.
Non-disclosure agreements (NDAs)
Employers can still prevent employees from sharing trade secrets, confidential business strategies, or proprietary client lists by requiring NDAs. That said, NDAs must be narrowly tailored to avoid acting as de facto non-competes, or they risk being struck down in California courts.
Non-solicitation agreements
In some limited circumstances, employers can prohibit former employees from poaching clients or other employees via a non-solicitation agreement. Be wary, however: California courts have been skeptical of broad non-solicitation clauses, particularly when they restrict an employee’s ability to continue working in their industry.
Trade secret protections
Employers can still rely on existing laws like the Defend Trade Secrets Act (DTSA) and California’s Uniform Trade Secrets Act (CUTSA) to protect proprietary business information.
These laws provide strong legal protections against employees who misappropriate confidential information without relying on restrictive employment agreements. Remember, however, employers can’t just call something a “trade secret” and make it so. Any information sought to be protected must still meet the legal definition of a trade secret.
What employees need to know
With California’s recent legislative changes, employees now have more protections than ever against restrictive employment agreements. However, many workers may still be unaware of their rights.
Non-compete agreements are void in California – even if you signed one
If you live or work in California, any non-compete clause in your employment contract is automatically void under Business and Professions Code § 16600. Even if you signed the agreement in another state, California law will still apply if you are working in the state.
Employers must notify you if you signed an invalid non-compete
Under AB 1076, employers were required to notify all employees hired after January 1, 2022 that any non-compete agreement they signed is unenforceable. If an employer fails to provide written notice, they may be subject to legal action.
You may have the right to sue if an employer tries to enforce a non-compete
SB 699 gives employees the right to sue employers who attempt to enforce a non-compete.
Employees can seek injunctive relief, damages, and attorney’s fees, making it costly for employers to engage in unlawful employment practices.
Be cautious of “workarounds”
Just because an employer removed a non-compete doesn’t mean the contract is fair. Employees should carefully review NDAs and non-solicitation agreements with their attorneys to ensure they are not being restricted in ways that violate California law.
Conclusion
The hey-day of broad non-compete clauses appears to be coming to an end, with California taking the most aggressive stance. Its laws go beyond banning enforcement – they prohibit employers from even including these controversial clauses in contracts. Moreover, even out-of-state companies with California employees have to comply, or they risk legal action.
At the federal level, the FTC’s attempt to ban non-competes was blocked in court, and the rule’s chances on appeal remain up in the air. That said, the very notion that the FTC drafted this extraordinary rules may signal a general disfavor of these types of clauses.
For lawyers, advising businesses and employees means keeping pace with these changes. Non-competes may be disappearing for good, and employers must adapt sooner rather than later.
