Did you know that 38% of career employees have been subject to contractual noncompete agreements? Come January 1st, 2024, guess how many of those noncompete agreements will remain valid in California.
(If you guessed zero, you’d be correct.)
That’s right! With the introduction of Senate Bill 699 (SB 699) and Assembly Bill 1076 (AB 1076), California has joined the ranks of four other states by taking a definitive stance against the use of noncompete agreements in employment contracts.
How will this affect California employers?
Keep reading to find out!
In this article, we will discuss SB 699 and AB 1076 at length and evaluate the implications they will have for both employers and employees in the Golden State. Plus, at the end of this quick read, you’ll be armed with a compliance checklist so that you can be sure your workplace policies are up to date and in line with these new laws.
Let’s get started!
What is a noncompete agreement?
A noncompete agreement is a legal contract between an employer and an employee.
This agreement restricts the employee from engaging in business activities that compete with their current employer's business, both during and after their employment period.
These restrictions typically include:
- Time frame – A duration for which the employee is restricted from competing, which can vary from months to several years.
- Geographic area – A geographical region where the employee is prohibited from competing.
- Scope of work – Specific types of work or industries in which the employee cannot engage that are in direct competition with the employer.
The primary purpose of a noncompete agreement is to prevent employees from using the knowledge, skills, and connections they gained from their current employer to benefit a competitor or to start a competing business.
New laws in California expand the regulation of noncompete agreements
Noncompete agreements have long been a contentious element in the U.S. labor market.
Why? On one hand, they can help employers protect proprietary information and prevent unfair competition. But, on the other, they can significantly restrict employee mobility and career advancement.
In this way, the use of noncompete agreements in employment contracts is a double-edged sword of contending interests:
- When implemented, employer interests are protected
- When omitted, employee interests are protected
This dual nature poses the question:
“Should noncompete agreements be allowed or restricted?”
(And, as you’ve probably guessed by now, the answer to this question often arrives at an ‘employers vs. employees’ standstill.)
It shouldn’t be surprising, then, that the legality and enforcement of noncompete agreements vary significantly across the U.S.
While many states allow these agreements under certain conditions, California’s precedent is that of strict opposition. Rooted in the state's Business and Professions Code Section 16600, California law generally views any contract that prevents an individual from engaging in a lawful profession, trade, or business as void.
By introducing SB 699 and AB 1076, California reinforces this philosophy, underscoring a continuing trend of legal reform in favor of employee rights, open competition, and enhanced career mobility.
A full breakdown of SB 699 and AB 1076
California's legal landscape for noncompete agreements gets a bold makeover with the introduction of SB 699 and AB 1076.
These laws, effective from January 1, 2024, expand upon California's already stringent stance against such agreements.
What is Senate Bill 699 (SB 699)?
SB 699 slams the door on noncompete agreements, explicitly prohibiting the use of them in California.
This bill makes it unlawful for employers to enter into, enforce, or threaten to enforce noncompete agreements with any employee who either resides or works in California. It also applies to noncompete agreements signed elsewhere should the employee move to California, effectively closing a pre-existing loophole.
The bill holds employers accountable by introducing civil penalties for violations. This is a clear signal to businesses that noncompete clauses will not be tolerated in the state, and any attempt to restrict an employee's right to work post-employment will be met with legal consequences.
What is Assembly Bill 1076 (AB 1076)?
Building on SB 699's ban, AB 1076 nullifies all noncompete clauses in employment contracts, regardless of wording or the circumstances under which it was signed. This includes agreements that may have been enforceable under the laws of other states.
What’s more, AB 1076 introduces a new notice requirement for employers.
Starting in 2024, employers must inform current and former employees that any noncompete provisions in their contracts are no longer enforceable. This notification must be provided to employees in writing and delivered on an individual basis to both their last known physical and email addresses.
Failure to provide this notice can result in civil violations under the California Unfair Competition Law, emphasizing the seriousness with which the state holds these agreements.
Are there enforceable noncompete exceptions under SB 699 and AB 1076?
Noncompete agreements in California are permissible in specific scenarios.
For instance, when a business owner sells their company, they can agree not to start a similar business within the same geographic area as the sold business. This is to prevent unfair competition with the new owner. Similarly, during the dissolution of a partnership or a limited liability company, the departing members might agree not to start or join competing businesses within the area where the dissolved entity operated.
These exceptions are generally considered enforceable.
Implications of California’s new noncompete laws for employers
So, what do these laws mean for employers?
Buckle up!
The introduction of SB 699 and AB 1076 in California comes with significant implications for employers, necessitating a reevaluation of their employment practices and strategies.
Here are some steps employers can take to evolve with California’s new noncompete laws:
1. Revise employment contracts
Employers must ensure that their contracts no longer contain noncompete clauses, as these will become useless. This change requires a careful review of existing contracts and policies to eliminate any language that could be interpreted as a noncompete agreement.
2. Rethink information security measures
With the traditional tool of noncompete agreements off the table, employers need to explore alternative methods to protect business interests. This might include placing a greater emphasis on reasonable nondisclosure agreements (NDAs) and confidentiality clauses, which are still enforceable in California.
3. Reevaluate employee retention strategies
Employers will have to adapt to an increasingly competitive job market where employees, no longer bound by noncompete restrictions, have increased mobility. This will likely require a heightened focus on employee retention. By offering more competitive compensation, frequent career development opportunities, and a positive workplace culture, employers may be able to avoid turnover trouble.
Implications of California’s new noncompete laws for employees
And, what about employees?
Take note!
SB 699 and AB 1076 mark a significant move toward amplified career opportunities for California employees.
This legislation will provide employees with:
1. Expanded professional autonomy
The elimination of noncompete clauses means that employees can pursue new job opportunities without the fear of legal repercussions from their former employers. This newfound freedom is particularly beneficial for professionals looking to advance their careers, switch industries, or start their own businesses.
2. Enhanced negotiation leverage
The changes brought about by SB 699 and AB 1076 empower employees to negotiate their employment terms more favorably. Without the constraint of noncompete agreements, employees have a stronger position to advocate for their interests, such as higher salaries, better benefits, and more flexible working conditions.
3. Elevated job market elasticity
Increased mobility in the job market means a more dynamic and competitive labor environment in California. Employees can leverage their skills and experiences in new settings, fostering innovation and growth across industries. This could also potentially lead to better job matches and increased overall job satisfaction, as employees are free to seek roles that align more closely with their career goals and personal values.
Want more information on all of 2024's most critical compliance updates?
Download our free compliance guide or watch our latest recorded webinar hosted by legal expert, Jason T. Yu, Partner with the law offices of Snell and Wilmer, for a complete breakdown of California's recent regulation changes.
How to comply with SB 699 and AB 1076 – A complete checklist
By following this checklist, you can ensure that your business not only complies with California's new noncompete laws but also maintains a fair and competitive work environment.
Understand the laws
- Familiarize yourself with the details of SB 699 and AB 1076.
- Identify what constitutes a noncompete clause under these new laws.
Update HR training
- Ensure your HR team is fully trained in the new legislation.
- Develop a plan for effectively communicating these changes to current and prospective employees.
Review employment contracts
- Examine existing contracts for any noncompete clauses.
- Remove or revise any language that could be interpreted as a noncompete agreement.
Implement notification process
- Develop a system for informing current and former employees about the invalidation of noncompete clauses in their contracts.
- Ensure notifications are clear, individualized, and legally compliant.
Adapt hiring practices
- Revise job applications to align with the new legal landscape.
- Update interview protocols and onboarding processes to avoid infringing upon the new regulations.
Next steps to comply with California’s new noncompete laws
With the introduction of SB 699 and AB 1076, California employment law is undergoing a major evolution.
You know what that means – it’s time to update your workplace policies to comply.
Is your business prepared for these quickly approaching changes?
This article has provided you with a foundational understanding of the new legislation. However, fully adapting to these legal changes requires more than just knowledge.
At Combined, we offer more than insights – we provide solutions! Our team of HR professionals is ready to assist you with any and all of your 2024 compliance concerns.
Don't let legal complexity stall your business! Instead, prepare for success by partnering with Combined for seamless compliance and peace of mind.
If you are not yet ready to speak with a team member, visit our Learning Center for the latest information on employment laws.
This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.
