As an employer, you entrust you employees with critical information regarding the business, such as private business processes, your client base and trade secrets. But what if a critical employee is fired or decides to leave the company for other employment opportunities. You will want to protect your business interests and you may think that having the employee sign a non-compete agreement will provide you with the protection you need. However, California, among other states, generally will not recognize or enforce a non-compete agreement except in very limited circumstances.
What if your business is headquartered outside of California?
You may wonder if you can still ask employees to sign a non-compete because your company is headquartered in another state. Unfortunately, California courts have ruled on this issue and have claimed that these non-competes are still unenforceable, rejecting the “choice of law” provisions.
What if the non-compete is voluntary of for consideration?
As an employer you may not mandate employees sign a non-compete. Instead, you may make signing voluntary and you may also provide consideration in exchange for signing the non-compete. However, California courts still will not enforce these non-competes.
Even “Garden Leave” policies will not be enforced. In these policies, higher level employees must give an extended period of prior notice that they will be leaving the company, during which time they do not have to show up to the workplace to receive full compensation. However, these policies are generally unenforceable.
What about the “inevitable disclosure” doctrine?
California courts will also reject what is known as the “inevitable disclosure” doctrine. What this boils down to is that an employer’s non-compete will not be enforceable to stop an employee from taking another job where it is reasonably likely that they will use prior confidences from their old job as part of executing their job duties in their new job. Unfortunately, employers simply must wait until the misappropriation of confidential information is committed before the employer can act on it.
Do employers have any non-compete options?
Employers should not lose hope that any non-compete is useless in California. In California, non-competes can prohibit current employees from moonlighting, especially if there are provisions restricting moonlighting in employee handbooks. Only a non-compete that is entered into after an employee quits, is laid off or is fired is likely to be unenforceable.
There are other exceptions to the unenforceability of non-competes. Buyers of a business can enter a non-compete with the seller that will stop the seller from competing with the buyer. Also, in a limited liability company, business partners can agree amongst themselves that they will not compete with the LLC if they decide to leave or sell it.
An employer’s ability to execute a non-compete is limited
As this shows, an employer’s ability to execute an enforceable non-compete agreement in California is limited. Still, employers may still have options to protect their interests when an employee leaves the business. Sometimes business litigation is necessary for employers to ensure their business interests are protected even if a critical employee leaves the company.