Can I Restrict My Employees From Working for My Competitor?

As an employment lawyer representing employers, this is one of the most frequently asked questions I get from my clients.

The short and safe answer is, "No." California has a strong public policy not to impede its residents' ability to work and make a living. California Business and Professions Code section 16600 provides that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

To that end, California courts consistently rule that covenants not to compete are unenforceable. A covenant not to compete can be worded a million different ways, but the intent of the clause is that if an employee leaves his employment, he or she cannot go work for an employer's competitor. Many times these clauses put mileage restrictions, such as the employee cannot work with a competitor within 100 miles of the business; or time restraints, such as two years. Regardless, just because you may think that the restrictions are not oppressive, a California court of law will most likely invalidate the provision.

With covenants not to compete being unenforceable in California, it goes without saying that employers may not force their employees to sign non-compete agreements. If employers make signing such an agreement a condition to continued employment, they face liability for wrongful termination and suits from subsequent employers for unfair competition.

There are several exceptions to the general rule against enforcement of covenants not to compete. California Business Code section 16601 permits a buyer of a business interest to enforce a covenant not to compete against the seller. Specifically, any person who sells the goodwill of a business or any owner selling or otherwise disposing of all of his ownership interest or operating assets in that business, may agree with the buyer to refrain from carrying on a similar business within a specified geographic area, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business in that area.

The second and third exceptions involve the dissolution of a partnership or limited liability corporation ("LLC.") Generally, a partner leaving the partnership, or a member of an LLC, can voluntarily agree not to compete with the existing partnership or LLC if the entity is going to continue to conduct business. The departing partner or member can agree to time and geographic constraints. This agreement has to be entered into voluntarily. (Bus. & Prof. Code sections 16602 and 16602.5)

For those employers that are panicking right now because you have an employment agreement or employee handbook that has a covenant not to compete provision in it, do not fret. Most courts will not invalidate the entire agreement if there is a non-competition clause. The best course of action is to remove the provision from any existing contracts or employee handbook. You can do this via an addendum or some other writing that makes it clear that the covenant not to compete is no longer a provision to the handbook or contract.

Does including a covenant not to compete in an employee handbook invalidate the entire handbook? No.