For good or bad, California frequently leads the way when it comes to employment law. The state is continuing this trend with noncompete agreements and other types of employment agreements. Are noncompete agreements legal in California? The general answer is “No,” although there are some narrow exceptions where your business may be able to legally use them.
Discover the legality of noncompete agreements under California law and statutory restrictions. California employees also have several options for addressing these restrictive covenants, thanks to a state law that was passed a few years ago.
Learn everything you need to know about noncompete agreements’ legality and California noncompete law.
Can Noncompete Agreements Be Legal in California?
Are non-compete clauses enforceable? In most situations, they are not enforceable in California. State law generally prohibits noncompetes and other restrictive covenants on the premise that they hinder an employee’s ability to work for a competitor or start a competing business after leaving a job.
Even if you include noncompete clauses in employment contracts to protect legitimate business interests, you probably won’t be able to enforce them, thanks to SB 699.
Senate Bill 699 went into effect on January 1, 2024, and it is one of the most notable noncompete agreement laws. The bill made it generally illegal for employers to enter into restrictive covenants, specifically noncompete agreements, with California employees.
SB 599 can also be used to challenge the enforcement of noncompete agreements in California, even if the employment was maintained or the contract was signed in another state.
Under this California law, employees can seek reasonable attorneys’ fees, injunctive relief, and damages if their employer tries to enforce unlawful noncompete agreements. Additionally, AB 1076 voided any existing noncompete agreements, unless the employer meets strict statutory exceptions.
Many states allow businesses to issue noncompete agreements and non-solicitation agreements, but California law has some of the toughest statutory restrictions in the nation.
A few years ago, the Federal Trade Commission issued a final rule on noncompete clauses. However, it is not as restrictive as the California state law on noncompete clauses. Here’s what you need to know about the FTC’s final rule.
The Federal Trade Commission’s Proposed Rule Was Finalized in 2024 but Struck Down
In 2024, the FTC issued a final rule that banned noncompete agreements nationally. Proponents of the rule change believe that eliminating noncompete agreements will promote the formation of new businesses and innovation. Along with non-solicitation agreements, noncompete agreements are viewed as restrictive covenants that interfere with workers’ rights.
The Federal Trade Commission’s final rule was not as restrictive as California law. There are more exceptions available to businesses when it comes to drafting employment contracts. Still, organizations must demonstrate that the clause protects legitimate business interests if the agreement is challenged in court.
Ultimately, federal courts struck down the FTC’s proposed rule. The Federal Trade Commission dropped its appeal.
California Law on Noncompete Agreements
California noncompete law is laid out in 16600 of the Business and Professions Code, which states, “Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
The broad language has been consistently upheld by California courts, making the legal status of noncompete clauses clear. This type of language in employment agreements is generally invalid and unenforceable.
Attempting to enforce employment agreements with noncompete clauses can result in civil penalties for your business. These restrictive covenants are deemed unfavorable by state legislators and the courts.
If you need to protect trade secrets or legitimate business interests, it’s best to consult with an employer attorney to explore your options. Your attorney can advise you on the legal status of employee noncompete agreements.
Why California Takes This Approach to Protect Labor Markets
California’s strict stance against restrictive covenants is rooted in its public policy goals, which include:
- Encouraging innovation and entrepreneurship
- Protecting employee freedom and career mobility
- Preventing unfair barriers to competition
The legal framework has helped foster growth in certain industries, such as tech and startups. That’s because talent moves frequently in these niches, and it has a net positive impact on the industry as a whole.
However, businesses generally structure employment contracts to protect their interests, which is sometimes counter to California’s economic goals.
What does this mean in practice? In general, the following are true:
- Employers cannot prevent former employees from joining a competitor
- Agreements that attempt to restrict future employment are usually unenforceable
- Courts rarely “rewrite” overly broad agreements; instead, they void them
The enforceability of noncompete agreements in California is much lower compared to other jurisdictions.
Are There Any Exceptions to the Noncompete Ban?
There are a few limited exceptions where your non-compete clauses may be enforceable.
Sale of a Business
A noncompete clause may be enforceable when:
- An owner sells their business
- A partner exits a partnership
- A member leaves an LLC
In these cases, the court may allow certain restrictions to protect the value of the business during the transitional period. However, there aren’t any blanket provisions that apply to all business sales.
Instead, you’ll need to consult with a noncompete agreement lawyer to clarify the best path for protecting trade secrets and supporting your interests during and after the transaction.
Protection of Trade Secrets
Broad noncompete agreements are largely banned in California, but the state does allow you to protect:
- Trade secrets
- Confidential business information
- Proprietary processes
While you cannot rely on broad noncompete agreements, you can include specific clauses relevant to legitimate business interests or trade secrets. Businesses that attempt to use confidentiality agreements as a disguised noncompete could face civil penalties or find that their trade secrets are not adequately protected.
Working with an employer lawyer to draft employment agreements is the best way to protect your organization’s most valuable secrets. An experienced legal team can draft agreements that operate within California law while also offering you adequate protection against unauthorized use or dissemination of confidential information.
Partnership and LLC Agreements
Certain restrictions tied to ownership interests in a business may be upheld. These clauses tend to be more easily enforceable in California, especially if they are linked to an ownership transition or dissolution of your business. However, even if a relevant exception applies, noncompete language will be strictly scrutinized by California courts.
Noncompete vs. Other Workplace Restrictions
One area of confusion involves how noncompetes differ from other types of agreements. Just because noncompetes are largely banned in California doesn’t mean all restrictive covenants are illegal. There are some alternatives you may be able to incorporate into your employment agreements.
Nondisclosure Agreements (NDAs) to Protect Confidential Information
NDAs are a valuable tool for protecting sensitive information. Generally, courts will enforce nondisclosure agreements if the terms and scope of them are deemed reasonable. NDAs are one of the most widely used tools for protecting trade secrets.
There is extensive state and federal case law on nondisclosure agreements, which can be helpful for understanding precedents in the court systems.
However, it’s still worthwhile to consult with an experienced employer lawyer when drafting NDAs. A skilled legal team can review your NDAs within the context of California law and make sure your documents are enforceable.
Non-Solicitation Agreements
Non-solicitation agreements restrict employees from soliciting:
- Clients
- Customers
- Other employees
However, California courts have begun cracking down on these agreements, especially if they function too much like a noncompete. The legality of non-solicitation agreements will largely come down to the language you use and the scope of the clauses.
Confidentiality Agreements
Confidentiality agreements are widely used and typically enforceable, provided they don’t overreach. The line is drawn when your employment agreements restrict employment itself. If an agreement protects legitimate business interests while still allowing individuals to work, it will typically be deemed enforceable.
What This Means for Employees and Employers
If you are an employee and asked to sign a noncompete in California, you should know the following:
- It’s likely unenforceable
- You may still have obligations related to confidentiality
- You should review the agreement carefully before signing it
As an employer, California’s stance on noncompete agreements means you should focus on other mechanisms for protecting your interests. In practice, this means:
- Including strong confidentiality and NDA language
- Using narrow agreements
- Avoiding overly restrictive language
Working with an attorney for noncompete agreement review will promote compliance and protect your interests.
Recent Developments and Compliance Considerations
Since SB 599 and the FTC’s final rule took effect in 2024, California has clamped down on enforcement. Expanded protections for employees and new case developments have created a quickly changing environment that employers must navigate. Now is the time for your business to:
- Audit existing agreements for compliance
- Remove or revise unenforceable language
- Train HR and legal teams on current laws
- Implement compliant alternatives
Staying proactive will help your business avoid disputes and stay aligned with the latest laws.
Partner With ARCH Legal for Questions Regarding Noncompete Agreements
Are noncompete agreements legal in California? In most cases, no, they aren’t. However, there are limited exceptions where you may be able to use non-compete agreements to protect your business.
If you have questions about when and how employment agreements fit into your risk mitigation strategy, the noncompete and non-solicitation attorneys at ARCH Legal are here to provide legal help for noncompete disputes.
ARCH Legal focuses on protecting an employer’s legitimate business interests, such as trade secrets, while working within the confines of state law.
Our legal team can assist with everything from drafting noncompete agreements for your business to drafting and reviewing employment contracts. Additionally, ARCH Legal assists with grievances against your business. Contact us to schedule a consultation.
