Can My Employer Enforce a Non-Compete Agreement if I Work in California but the Business is Headquartered in Another State?

 Can My Employer Enforce a Non-Compete Agreement if I Work in California but the Business is Headquartered in Another State?

Most companies go out of their way to protect their data. Data typically includes trade secrets which is often found in internal communications, customer lists, and other information which they do not wish to have “leaked” to other businesses. However, in some cases, a business attempts to discourage their employees from taking information they learn while an employee and starting a competing business.

Employers often demand an employee sign a non-compete or non-solicitation agreement to ensure they do not have to be concerned about the employee later becoming their competitor or working for a competitor. However, under California laws passed in 1985, these agreements are not enforceable because they contain restrictive covenants — that is they restrict the employees ability once they are no longer working for the firm to secure similar employment with another firm, or start their own business which is of a similar nature.

Out of State Business Doing Business in California

California, like most other states, allows businesses which are incorporated or set up in other states to do business within its borders assuming they follow the regulations published by the Secretary of State. In some cases where this occurs, a business owner will draw up a non-compete agreement and specify the agreement was made in another state. This is known as a choice of law provision, which may mean the restrictions, or covenants are enforceable.

However, this does not always mean your employer has the right to enforce a non-compete agreement, even if it contains a choice of law provision. For example, an employee who works in California, for a company who has headquarters in Arizona may be asked to sign a non-compete agreement which states the “choice of law” is Arizona. This is when California courts will review the rules as they pertain to conflict of law.

How Conflict of Law Applies to California Employees

If you are working in California, in a company which maintains an office in California, you may be unaware the company is actually headquartered in Arizona. To complicate matters further, oftentimes a non-compete clause is inserted into other employment documents and is only pointed out should your employer feel they are threatened by your competing with them after you have left the company.

An employer may opt to have you “sign” your documents in Arizona — in this case, then chances are the document could be enforceable under Arizona laws. However, it is also worth noting in most cases, a choice of law provision which violates public policy of the other state could be determined to not apply in such cases.

Since 2018, when these changes went into effect, the goal was to protect employees from being bound to agreements which violated their right to pursue employment with competitors or to start a competing business after leaving one employer. Keep in mind, these documents are often signed as part of the paperwork you sign when you are initially hired. In rare circumstances, an employee may be told they cannot be hired unless they sign a non-compete agreement. This is unlawful in California because they are not enforceable within the state.

The code which makes these unenforceable is  found in California Business and Professions Code Section 1660specifically states “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.

Not Limited to Key Figures or Managers

Many employees believe they have nothing to be concerned about with such clauses in their employment contracts because they are “lower level” employees. However, according to the U.S. Department of the Treasury Office of Economic Policy, across the United States, 20 percent of those who are bound by non-compete agreements, including 14 percent of those earning less than $40,000 per year. Therefore, it is not safe to assume you have no need for concern.

Because employers were routinely attempting to skirt the statutes regarding non-compete agreements, the California Labor Code (Section 925) was modified to specify that any agreement which was entered into between an employer and employee after January 1, 2017 would not be allowed to include non-compete agreements a provision as a condition of employment.

This portion of the Labor Code also went a step further and specified that the employee who lives in and primarily worked in California could not, without the guidance of an attorney, agree to have any future disputes heard in a court outside of California law or agree to such provisions under any state’s laws except California.

There are exceptions to when something may be enforced, even if it is part of an overall unenforceable agreement. For example, if an employee were to leave a company and begin soliciting clients to their business from their prior employer, or if the employee were to begin sharing internal trade secrets with a competitor. In the event your former employer filed a lawsuit, the general provisions may be upheld in court.

When Employers Retaliate Against Former Employees

When your employer attempts to stop you from accepting a job because they claim it is in violation of a non-compete or a non-disclosure agreement, one of two things will occur. You may receive a cease and desist order, or you may be notified a lawsuit has been filed against you by a former employer. In either case, you should immediately contact an attorney to learn about your rights and protect yourself from missing an opportunity to further your career.

If you are starting a new position and being asked to sign a non-compete agreement, you should seek legal help immediately before you sign the agreement. It is important for you to know whether the agreement is enforceable before you sign any documents. Whether you need help negotiating a contract, reviewing an employment contract, or you are in receipt of notification of a pending civil lawsuit, or a cease and desist order, contact Perkins Asbill, A Professional Law Corporation at 916-446-2000. We have more than three decades of labor and employment law experience representing clients in central and northern California.