January 03, 2017 | Trade Secrets and Transitions

California Further Restricts Employers from Trying to Enforce Non-Compete Agreements

Are you an employer based outside of California with employees who live or work in California? If so, you will want to take note of a new California Labor Code provision that becomes effective on January 1.

Not surprisingly, companies headquartered outside of California generally have employment agreements that are purported to be governed by the substantive law of the state in which the company is headquartered. This is true even when the company hires employees who live and work in California.

But companies need to be aware that, effective January 1, new California Labor Code section 925 goes into effect and limits their ability to apply the substantive law of a different state to their California employees. (The new provision applies only to contracts “entered into, modified, or extended on or after January 1, 2017,” and does not have retroactive effect.)
Section 925 will prohibit an employer from requiring an employee who resides and works primarily in California to agree to a provision that would (1) deprive the employee of the substantive protection of California law with respect to a controversy arising in California; or (2) require the employee to litigate or arbitrate outside of California a claim arising in California. The law applies to any agreements – employment agreements, non-disclosure and IP agreements, etc. – but exempts from these provisions a contract with an employee who is individually represented by legal counsel in negotiating the terms of an agreement to designate the venue, forum, or choice of law.

The law will make any provision of a contract that violates these prohibitions voidable, upon request of the employee, and would require a dispute over a voided provision to be litigated or arbitrated in California and apply California law.

The implications of this law are significant. For example, non-compete clauses generally are not enforceable in California. But some employers require their California employees to sign employment agreements with a non-compete clause and escape California’s prohibition by otherwise providing that the agreement is governed by another state’s law. And because some California courts may decline to enforce that choice of law provision because it conflicts with California’s strong public policy, some employers further require that disputes be adjudicated in another state more likely to honor the stated choice of law.

Section 925 allows a California-based employee to void those provisions, adjudicate their employment disputes in California, and ask that California law be applied. In short, section 925 seeks to prohibit employers, even if they are headquartered outside of California, from circumventing California’s public policy in favor of employee mobility for California residents.

Finally, although section 925 provides that non-compliant clauses are voidable by the employee, the law also says that an employer “shall not” require an employee to agree to them in the first place. Conceivably an employer will violate the California Labor Code, and be subject to liability, regardless of whether the provision is ever enforced by the employer or challenged by the employee.

So if you have employees who live or work in California, but your employment agreements have a choice of law provision that specifies some law other than that of California, or requires litigation outside of California, you should consider modifying those provisions for your California employees as soon as possible.