Non-compete agreements and other restrictive contractual provisions have come under fire in recent years, and now California has enacted a law that allows these types of provisions to be void except under a single, narrow circumstance.
California Labor Code Section 925 went into effect on January 1, 2017, and will impact any contracts entered into, modified, or extended on or after that date that has a non-complete clause written into them.
Beginning of the Ban on Non-compete Agreements
In March 2016, a report from the US Department of Treasury was indeterminate on the question of whether low-wage workers who were bound by a non-disclosure agreement hampered their mobility as laborers or if it was a legitimate method of protecting business interests.
A few months later, in October, the White House issued a call to action, asking the states to ban non-compete clauses for particular groups of workers. It also asked the states to improve the “fairness and transparency” of the restrictive agreements and provide incentives to employers to draft narrower, enforceable non-competes instead of the broad agreements now in place that kept workers from having a choice of employer.
California has always been against post-employment restrictions and already had a statutory ban on many of the restriction clauses commonly used by employers.
- California courts will not honor choice-of-law if the law that is chosen allows an employer to enforce a non-compete.
- California rejected non-California forum selection for contracts with mandatory choice-of-forum provisions, closing a loophole employers had been using to get around the non-compete clause restriction.
The second point was upheld in the California courts in 2015, holding that forum-selection provisions were not enforceable if they deprived an employee of a non-waive-able statutory right.
The most recent move by the State of California was the passage of California Labor Code Section 925, which went into effect January 1, 2017.
How California Labor Code Section 925 Widens the Ban on Non-competes
Section 925 limits the ability of an employer to require an employee who reside and works primarily in California to agree to any provision that would mandate the employee engage in litigation outside of the state on a claim that arose in California.
The employer is also banned from enforcing provisions that would deny the employee protections of California law if a controversy arose in the state. The section applies to any agreement:
- Employment agreements
- Non-disclosure agreements
- IP agreements…
…and all the rest.
There is but one exemption: if an employee is individually represented by counsel when the contract is negotiated, and the agreement designates the venue, forum, or choice-of-law the contract can be upheld.
Otherwise, for every other contract that is signed, modified, or renewed on or after January 1, an employee can request that any restrictive clauses prohibited by Section 925 be voided. Any dispute over a voided provision must be litigated or arbitrated in California, and California law applies.
Implications for the Employer
Even before January 1, non-compete clauses and the like were not enforceable in California as a general rule. Some employers would still require California employees to sign employment agreements that contained a non-compete clause. They got around the earlier prohibition by stating the agreement was governed by the law of another state, not California’s.
Employers knew that some California courts would decline to enforce the choice-of-law provision (enforcement through another state’s law) because it conflicted with California’s strong public policy. Therefore, the employers tried to set up disputes to be adjudicated in another state that would more likely honor choice-of-law.
Section 925 shuts down those provisions and requires adjudication of employment disputes to be held in California according to California law. Employers can no longer circumvent California public policy; instead, the state favors protecting employee mobility for California residents.
Section 925 goes further and states that while these restrictive clauses can be voided by employee law, employers “shall not” require an employee to sign such agreements in the first place. Even if the provision is never enforced by the employer or challenged by the employee, California will consider an employer to be in violation of state labor law if the restrictions remain in the contract.
What Can You, as an Employer, Do?
You should revise any agreements if:
- You are not based in California yet have employees who live or work there
- Employees have signed agreements with choice-of-law provisions or any requirement for cases to be litigated outside the state
You are also strongly advised to provide notice regarding whistle-blowing activities to accord with the Defense Trade Secrets Act (DTSA). Review all of your agreements that contain non-compete and similar restrictive clauses to see if they would be upheld by the California courts. If they do not, take steps to revise them to cover a reasonable protect-able interest.
Otherwise, employers with California employees may not require them to agree to adjudicate disputes outside the state or deprive them of California state law. The exceptions to the new rules are increasingly narrow.
California’s Section 925 ruling effectively voids the use of restrictive clauses such as:
- non-compete agreements
- non-solicitation agreements
- intellectual property agreements
- so on if the employee requests the clauses to be voided
In addition, any disputes concerning the restrictions must be adjudicated in California according to California law.
However, if the employee is individually represented by legal counsel during the negotiation of an employment agreement designating venue, forum, or choice-of-law, Section 925 does not apply.
We should also note that Section 925 appears to apply only to California employees with respect to controversies or disputes arising within the State of California or that require a California employee to litigate or arbitrate any claim arising in California outside the state.
Time and the courts will tell the true impact to employers and employees. The state seeks to protect the mobility of the employee by staying the enforcement of clauses it determines to be restrictive to that mobility. However, employers still need to hold certain information protected.
Have a Los Angeles attorney experienced with California law go over your contracts if you seek to decrease the potential impact of this law on your business concerns.