California Further Restricts Employers Trying to Enforce Non-Competes
Companies that have headquarters outside of the Golden State typically have employment contracts that purportedly are governed by the substantive law of the state in which the enterprise is headquartered. California’s 2017 labor laws changed this and companies need to make themselves aware.
California Labor CodeUnder section 925 of the California Labor Code, a company's ability to apply the substantive law of a different state to California employees is limited. This law, which went into effect earlier this year, only applies to employment contracts that were "entered into, modified, or extended on or after January 1, 2017." In other words, these changes are not retroactively applied.
Specifically, section 925 forbids an employer from mandating an employee who primarily resides and works in California to agree to a provision in an employment contract that would require the employee to litigate or arbitrate outside of California in a claim arising in the state, or deprive an employee of the substantive protection of California law regarding a case arising in the state. The law applies to any agreement, including employment contracts, non-disclosure agreements and intellectual property agreements. A contract with an employee who is individually represented by an attorney who negotiated the terms of the contract to designate the forum, venue or choice of law, however, is exempt from this law. Moreover, any section of a contract that violates the law is voidable upon the employee's request. A dispute over a voided provision would have to be litigated or arbitrated in California and apply the state's law.
Non-Compete AgreementsGenerally, non-compete clauses are not enforceable in the state of California. Some employers, however, were requiring California workers to sign employment contracts that contain non-compete clauses with terms that provide the agreement is governed by another state's law or mandates the disputes be adjudicated outside of California, where the stated choice of law will likely be honored. Section 925, in short, would prohibit employers, even if headquartered outside of California, from circumventing California's public policy that strongly favors employees. Finally, while non-compliant clauses are voidable under Section 925 the law also forbids an employer to require an employee to agree to these terms in the first place. When an employer violates California Labor Code, it will be subject to liability whether or not the provision is enforced by the employer or challenged by the worker.