Our Alert on November 30, 2023 extensively described California Senate Bill 699, which expanded the reach of the California rule that contracts restricting post-employment competition by employees are generally unenforceable. The scope of the expansion is unclear, but many commentators conclude that, at a minimum, it may apply to a contract entered outside California (for example, between a New York employer and a New York employee to perform services in New York) if the employee later seeks employment in California.
The California Legislature subsequently enacted another bill affecting contracts with noncompete clauses, Assembly Bill 1076. AB 1076 states it is declaratory of existing law but contains new language requiring certain employee notifications by February 14, 2024, plus penalties for noncompliance. A flurry of law firm bulletins have recently been telling employers to review their contracts and make the necessary notifications. Since not all clients may have seen these bulletins, and the scope of SB 699 has not yet been tested, we want to describe what’s going on.
As we see it, the employer is instructed to go through a multi-step process:
- Identify all current employees and former employees hired after January 1, 2022, who are subject to contracts with a noncompete clause;
- Decide if the noncompete clause is void;
- If so, send the employee an “individualized” written communication by February 14, 2024 that the clause/agreement is void.
Failure to comply is labeled an act of unfair competition under sections 17200, et. seq. of the California Business and Professions Code (we will return shortly to the significance of being so labeled).
What do you do if you’re sure the noncompete language is void?
The easy case is when the noncompete language is clearly void. For example, if it’s a California employer and the contract is with a California resident performing services in California, and none of the very limited statutory exceptions apply, then the void contract triggers the notice requirement.
But is there a potentially easier way—just have the employer unilaterally amend the contract to remove the offending language. This might be done in one corporate document stating all contractual provisions restricting competition inconsistent with the California laws are invalid. While we think notice of that amendment will eventually need to go to the affected employees, it’s not clear why there would be a February 14 deadline any longer since the offending language no longer exists.
Of course, legal counsel will need to be consulted and become comfortable with this approach.
What do you do if you’re not sure the noncompete language is void?
Things get harder to analyze if you’re not sure where your contract is illegal. Let’s return to our contract entered between a New York employer and New York employee to perform services in New York. It contains a noncompete clause that is written so broadly that it might apply if the employee quit and went to work in California. Do you already have a void noncompete clause under California law, so notifications have to go out by February 14 or is it only void if the employee has established contacts with California? While we would hope the notification requirement is only triggered in the latter case, this seems like an issue where labor counsel’s opinion is critical.
A similar situation arises if the employer believes that it can use some of the approaches described at the end of our November 30 Alert as a workaround to the new California law.1 To the extent these strategies are ultimately held not to work, this is perhaps equivalent to the conclusion that the February 14 notice requirement was not met.
What are the penalties for noncompliance?
The considerations above suggest a critical inquiry may be determining the degree to which failure to send the notice has significant consequences under section 17200 of the Business and Professions Code. This is a complicated issue because the relevant penalty sections are covered in several sections following 17200. But based on our preliminary reading, which is consistent with the law firm bulletins we have studied, the most significant penalty may be found in section 17206.
Section 17206 provides a fine of up to $2,500 for each violation, but it is subject to mitigating factors, such as the nature and seriousness of the misconduct, the number of violations, the length of the violation, and the willfulness of the violation. Prosecution is vested in the California attorney general, the California district attorneys, and, in certain cases, other county and city lawyers.
An employer uncertain as to whether it can make the February 14 deadline or as to which contracts AB 1076 applies may want to consult with its labor counsel, so as to have a realistic view of the potential implications if found out of compliance.
1 The Alert on November 30, 2023, describes the strategy of suing first in the state where the contract was signed or taking advantage of California Labor Code section 925. As described in the Alert, depending on how these strategies are implemented, there may be uncertainties as to their efficacy.
Dave Gordon’s practice as an executive compensation consultant covers a variety of industries, including extensive experience with financial institutions and utilities. Based on his years of experience as an executive compensation lawyer, he acts as the senior resource on numerous technical issues for the Firm. He frequently acts as an expert witness.
Kenneth H. Sparling
Ken Sparling’s assignments have been with both public and privately-held companies in various industries. His consulting engagements focus on all aspects of executive and board compensation including annual and long-term incentive programs, employment agreements and change-in-control arrangements.
Michael Abromowitz consults on all aspects of executive and board compensation including executive compensation benchmarking, annual and long-term incentive program design, peer group development, and executive severance and change-in-control plans.