Seyfarth Synopsis: For employees looking to leave somewhere greener for somewhere warmer, California may now be climbing to the top of their list. On September 1, 2023, Governor Newsom signed legislation that extends California’s restrictions on non-compete agreements to contracts signed out of state, effective January 1, 2024. Specifically, SB 699 provides that any contract that is void under California law is unenforceable in the Golden State, regardless of where and when the employee signed the contract, and it created a private right of action for employees whose agreements include restrictive covenants.

Up In The Mountains, Down By The Ocean – The Far Reaching Implications Of California’s New Non-Compete Law

Under existing California law, non-compete agreements with California employees are typically void, with limited exception.

The new law goes a step further and adds section 16600.5 to the Business and Professions Code, which provides the following restrictions:

  1. Any contract that is void under Business and Professions Code section 16600 is unenforceable regardless of where and when the contract was signed, and cannot be enforced.
  2. An employer cannot enter into a contract with a prospective or current employee that includes a void provision under this chapter.
  3. An employer that enters into, or attempts to enforce a void contract commits a civil violation, and may be subject to a private action for injunctive relief or monetary damages. An employee bringing such an action may also recover reasonable attorneys’ fees and costs.

A Rebel Without A Cause…Can California Do That?

While California has long separated itself from the majority of the country in its treatment of employee non-compete agreements, the wrinkle in this new law is that it attempts to interfere with employee non-compete agreements that may be valid under another state’s law, which raises constitutional concerns under the commerce clause, full faith and credit clause, and potentially the contract clause.

For example, an employee based in Florida bound by a non-compete agreement enforceable under Florida law may be trying to outrun the bad luck tailin’ them and seek employment with a California-based company. Under the new California law, the agreement would be considered void and unenforceable under SB 699. If the employee’s former Florida employer sends a cease and desist letter to the California company saying they cannot hire the employee because of the non-compete that is enforceable in Florida, under this new law the California company can nullify the lawful Florida contract.

This new legislation puts in question whether California based employers should ask their non-California based employees to enter non-competition agreements even if they are enforceable under the laws in which the employee works or resides. In other words, the new law seeks to protect California employers and allow them to be more competitive by being able to hire out of state employees and not have them be bound by non-compete agreements in California. But then, why should those same California based employers be permitted to use non-compete agreements with out of state employees and enforce those agreements out of state? This is yet another example of the peculiarities of California.

Let’s Flip A Coin On Whether There Are More Limitations To Come

It may seem like the California legislature may sometimes be driving for a day and then taking a look at the map when it comes to some of its proposed legislation, as this session has another bill that was passed and is waiting for the Governor’s signature. AB 1076 is another bill focused on non-compete agreements. If signed by the Governor, this legislation would codify the 2008 California Supreme Court decision in Edwards v. Arthur Andersen LLP and void all employment noncompete agreements no matter how narrowly tailored.

This proposed bill also includes a notice requirement. AB 1076 would require employers to notify current and former employees in writing by February 14, 2024, that any noncompete clause or agreement they had entered into are void.

There has also been recent interest by the FTC in banning or reforming non-compete laws on a nationwide basis.

Workplace Solutions

Your business may be thinking they’re gonna get out of here if they gotta ride a Greyhound bus, but they need to keep in mind that if their workers stay in California or move here, their agreements may no longer be valid. So, employers of California workers who utilize non-compete agreements in any context should review and consider revising their employment agreements, offer letters, employee handbooks, and policies to remove any non-compete provisions that may continue to exist with their California employees, consider the implication of SB 699 and/or AB 1076 on their out of state workers, and ensure that recruiting and hiring practices take into account the new legislation. The authors and your favorite Seyfarth attorneys are always available to help employers navigate the road to compliance and will be closely following the new and proposed California legislation and any potential legal challenges.

Edited by Cathy Feldman and Coby Turner