The New York Times recently published a series of exposes on how employers use non-competition agreements, or “noncompetes,” to prevent employees from making a living at other companies. According to the latest piece in the series, the use of noncompetes in the employment context has spread down the economic pyramid from executives and other high-level employees to blue-collar workers ranging from factory managers to sandwich makers earning $8 an hour to people who simply “dig dirt” for a living.
While they may have some value when applied to highly skilled top employees, noncompetes can be egregiously unfair to lower-level workers who have few other avenues to support their families and can’t sit idle for months or years waiting for the agreements to expire. Yet nearly every state enforces noncompetes in the employment context.
The good news is that in California, these unfair agreements are illegal and unenforceable.
Why noncompetes stink
Employees usually sign contracts containing noncompetes when their bargaining positions are weakest — often on the first day of a new job, or perhaps tied to a small raise. Many workers don’t even realize they’re agreeing to these noncompetition provisions, which—like arbitration clauses—are often buried deep in the fine print. Yet noncompete agreements can contain all manner of restrictions on an employee’s right to make a living: They may prohibit a worker from seeking employment in the same industry or starting a competing business for a specified period of time—often a year or more—and within so many miles of their employer.
Recent reports have found that between 20 percent and 40 percent of American worker are bound by non-competes. That includes 14 percent of workers earning less than $40,000 per year. Executives justify the use of noncompetes by pointing to the time and effort they invest into training employees; they don’t want to lose out on that investment to competitors who poach those workers. But the devastating effect on employees’ lives, especially at the lower end of the income distribution, can far outweigh the potential benefit to employers.
For instance, the New York Times series highlights several examples of workers accepting better offers and then being sued or threatened with a lawsuit by their old employers. In the end, the employees often end up losing their new jobs because the new company doesn’t want to defend a lawsuit—or even terminates the employee out of “respect” or deference to the old employer.
Consider the case of Keith Bollenger, a manager who had spent two decades working his way up at the same factory. After his employer cut his salary, he found and accepted a job offer with a small raise at a rival factory. His former company sued him and won on appeal, with the legal bills devouring his life savings. And the new company sent him packing:
When he said yes, it set off a three-year legal battle that concluded this past week but wiped out his savings along the way. . . .“I tried to get a better life for my wife and my son, and it backfired,” said Mr. Bollinger, who is 53. “Now I’m in my mid-50s, and I’m ruined.”
Beyond the toll on individual workers, noncompetes harm the broader economy. Their use has been shown to depress wages, stifle innovation, and reduce overall investment in human capital. Seeing these effects, several states have begun considering legislation to curb the use of noncompetes.
Employee noncompetes are unenforceable in California
The situations above reflect a triumph of business interests over those of individual employees. But California has a strong public policy in favor of employees’ rights: “The interests of the employee in his own mobility and betterment are deemed paramount to the competitive interests of employers.” Thus, under California’s Business & Professions Code section 16600, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
It is against California public policy to fire an employee for refusing to sign an agreement containing a void noncompete provision, and doing so exposes an employer to wrongful termination liability. Moreover, the California Court of Appeals has extended that prohibition to employers that fire or refuse to hire someone because that person has signed an illegal noncompete agreement with another company.
Contrary to what some people think, there is no “trade secrets” exception to the blanket ban on employee noncompetes. Companies may prohibit former employees from using the company’s confidential information to benefit a competitor, but may not prevent an employee from going to work for the competitor in order to protect that confidential information.
Recent changes have made California law even more protective of employees. If you have signed or are being asked to sign a noncompete agreement, or are being threatened with a lawsuit based on such an agreement, contact employment attorney Eric Grover at Keller Grover LLP for a consultation on your rights.