California has a 150-year history of barring the non-compete clause. So many businesses coming in from other states or just beginning to hire staff could be in for a rude awakening when they start to hire or employees leave. Just for the sake of comparison: about 20 percent of workers across the United States are bound by non-compete agreements, including 14 percent whose earnings are less than $40,000 per year.
Some companies in California continue to have employees sign non-competes when employees are hired or as part of the exit package, but the courts have routinely dismissed any enforcement involving non-compete, non-solicitation or restrictive covenants. As always, however, there are exceptions.
The exception to the rule
The few exceptions to the non-compete prohibition include:
The seller of a business: The sole proprietor or shareholder may sell the good will of the business to the purchaser or otherwise dispose of their interest in the business entity.
Partners and members of an LLC: Similar to the above rule, these owners can mutually agree that none of them will engage in competition with the business after leaving or selling. This can involve a period of time or a specified geographic area. This also applies to partners who leave for any reason. Courts will also scrutinize nominal partners to ensure that they were truly partners and not an employee.
California offers many unique business challenges
The non-compete issue is just one of the many unique facets of business law here in California. An experienced employment law or business law attorney practicing here can help educate new owners, protect the rights of workers and ensure that a company’s bylaws are compliant with local, state and federal laws.