By Dan L. Gildor & Xinying Valerian

Non-compete clauses prohibit employees from working for competitors or starting their own competing businesses for a certain period after leaving a job. Such clauses have long been viewed as an unscrupulous tool used by companies to unfairly restrict workers’ career mobility, suppress wages, and hamper innovation.

Californias Stance

For these reasons, California has long banned such clauses in employment contracts. Business & Professions Code section 16600.

Nonetheless employers continue to sneak such clauses into non-disclosure agreements, commission agreements, stock option and equity compensation agreements, severance/separation agreements, training repayment agreements, and even pension plan agreements.

FTC’s Groundbreaking Announcement

If there was any doubt left in California about the validity of non-compete clauses, that doubt was laid to rest this week when the Federal Trade Commission announced its final rule declaring that non-compete provisions in employment contracts are unlawful.

The rule is set out in 16 CFR Part 910. The rule bans new non-compete clauses for all workers, including senior executives. Specifically, the rule declares that it is an unfair method of competition—and therefore a violation of Section 5 of the FTC Act—for employers to enter into non-compete agreements with workers.

Existing Non-Compete Agreements

For existing non-compete agreements, the rule allows existing non-compete agreements between companies and their senior executives—those workers who earn more than $151,164 per year who are in “policymaking” positions—to remain in force. However, existing non-compete agreements with workers other than senior executives can no longer be enforced. 

The rule also requires that employer provide a “clear and conspicuous” notice to workers with existing non-compete agreements that the agreements will not, and cannot, be enforced against the worker. 16 CFR 910.2(b). The notice must be provided by the rule’s effective date, which is 120 days after it is published in the Federal Register. 

The FTC estimates that this ban will reduce health care costs, increase the number of new businesses formed each year, and increase innovation and worker’s wages. 

Despite these pros, trade groups and other business organizations and lobbyists will likely challenge the rule in court.

California’s Ongoing Protections

In the meantime, California law will continue to protect workers in California. As noted above, Business and Professions Code section 16600 bans such clauses in employment contracts. Moreover, Labor Code 432.5 prohibits employers from requiring any employee or job applicant to agree, in writing, to a term or condition that is known to be prohibited by law. Accordingly, an employer’s requirement that a California employee or job applicant agree to a non-compete clause would be illegal regardless of the fate of the new federal ban. 

But the new federal ban will still be impactful when it comes to remote employees who work outside of California, and employees who relocate to California from a state that allows noncompete clauses.

Are You Subject to a Non-Compete Clause?

If you believe that you are subject to a non-compete clause, you should seek out the advice of an experienced legal professional to determine your rights and remedies, which include a share of the civil penalties that the employer could be forced to pay if an employee brings a lawsuit against the employer for violating California law. Contact Valerian Law, today, 888.686.1918.