California employers be aware: Noncompete agreements are illegal and unenforceable in this state.
Don’t even try to prohibit an employee from working for your competitors for a certain amount of time after leaving your employ: You’ll undoubtedly lose if he or she takes you to court.
California’s Business and Professions Code section 16600 states that “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
There is an exception to the ban on noncompetes: Such an agreement may be enforceable against the seller of a business, to prevent him or her from opening a competing shop and soliciting former clients for the new business. That can also apply to a former business partner or a former member of an LLC.
So how do you, as an employer, protect yourself? You can ask employees to sign a nondisclosure agreement to protect your trade secrets. California law does allow a company to protect confidential business information. Such information can include customer lists, employee lists, pricing structures, contract and discount terms, supplier sources, business plans and computer software and databases.
However, it’s only a trade secret if you make a reasonable effort to keep the information confidential. Be sure to take any information you consider a trade secret and mark it “confidential.” Create a confidentiality policy, have every employee sign it, and add a section to your employee handbook explaining that policy. Use common sense in determining what is confidential and what isn’t. Your client list isn’t confidential if you include it on your website, for example.
Another kind of agreement, a nonsolicitation clause, might be enforceable, but it has to be narrowly drafted primarily as a means to protect trade secrets. That is, as an employer you can prohibit the use of trade secrets – such as a customer list – to solicit customers away from your business. You can also prevent former employees from using confidential information to lure employees away. However, the courts take a dim view of nonsolicitation clauses that are veiled attempts at noncompetes. You’ll want to consult an attorney before drawing up such a document.
If you want to know how to protect your California company from former employees – without breaking any laws — contact Johnson Employment Law for guidance, 949-238-8044.