Deadline Approaching for Employers to Provide Employees with Notice of Voided Non-Competes
Assembly Bill (AB) 1076, signed into law earlier this year, makes any non-compete clause, no matter how narrowly tailored, void as a matter of statute unless certain limited statutory exceptions are met.** This component of the bill isn’t “new” law in the traditional sense. Non-compete clauses have been void under Business and Professions Code Section 16600 for decades and the 2008 California Supreme Court decision of Edwards v. Arthur Andersen LLP made clear that California courts were also willing to enforce the state’s long-standing disdain for non-compete agreements. AB 1076 now comes forth to marry the Code with the caselaw by amending Business and Professions Code Section 16600 so that it will read as follows (new language is indicated in bold):
(a) Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.
(b) (1) This section shall be read broadly, in accordance with Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, to void the application of any noncompete agreement in an employment context, or any noncompete clause in an employment contract, no matter how narrowly tailored, that does not satisfy an exception in this chapter.
(2) This subdivision does not constitute a change in, but is declaratory of, existing law.
(c) This section shall not be limited to contracts where the person being restrained from engaging in a lawful profession, trade, or business is a party to the contract.
** Statutory exceptions to Section 16600 include restrictive covenants in the sale or dissolution of corporations, partnerships, and limited liability corporations. See Cal. Bus. & Prof. Code §§ 16601, 16602, 16602.5.
Importantly, the statute requires a broad interpretation of non-compete agreements and also applies to agreements where the restrained party was not a party to the contract. This means that other restrictive agreements, such as non-solicitation of employees, customers and vendors, and agreements between businesses prohibiting the solicitation of each other’s employees, are likely also void under the new law.
AB 1076 goes even further though by creating a new statute, Business and Professions Code Section 16600.1, which makes it unlawful for an employer to include a noncompete clause in an employment contract or to require an employee to enter a noncompete agreement that does not satisfy one of the statutory exceptions.
Section 16600.1 also requires employers to notify current and former employees (those employed on or after January 1, 2022) who were subject to a non-compete that the unlawful provision or agreement is void. The notice must be in an individualized writing to the employee or former employee and delivered to their last known address and email address. The deadline for this notice is February 14, 2024.
We recommend an audit of all employment policies, contracts and agreements to identify non-compete or non-solicitation clauses as well as a review of business contracts to ensure any non-compete provisions are within the parameters of the law.
As always, if you require assistance or have questions regarding compliance with this or other employment-related issues, please reach out to an SMT employment law attorney.
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Spaulding McCullough & Tansil LLP
Employment Law Group