As employers know, the rules surrounding noncompete provisions remain in flux. Earlier this month, California enacted new legislation, Senate Bill No. 699, impacting and further restricting noncompete provisions and echoing the increased skepticism (and corresponding increased restrictions) of noncompete provisions in numerous states, as well as at the federal level. Below is a high-level update on some of the more recent changes in the noncompete landscape.
On September 1, 2023, Gov. Gavin Newsom signed Senate Bill No. 699 into law, amending California Business & Professions Code Section 16600, and it is scheduled to take effect on January 1, 2024. California courts and statutes already strongly disfavored noncompete restrictions. As currently written, Section 16600 states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind” is “void” except for limited exceptions. Senate Bill No. 699 will add Section 16600.5 to the Business and Professions Code and is intended to extend the prohibition in Section 16600, making it unlawful for employers to enter into or attempt to enforce noncompete provisions and clarifying that these restrictions are void in California regardless of when and where the contract was signed. An employer or former employer will be prohibited from enforcing a void noncompete provision “regardless of whether the contract was signed and the employment was maintained outside of California.” According to the Legislature, “The California courts have been clear that California’s public policy against restraint of trade law trumps other state laws when an employee seeks employment in California, even if the employee had signed the contractual restraint while living outside of California and working for a non-California employer.” Senate Bill No. 699 prohibits an employer for entering into an employment contract with an employee or prospective employee when that contract includes a provision that is void under Section 16600. Any violation will be a civil violation and could result in injunctive relief for the employee (or former employee or prospective employee), as well as actual damages, reasonable attorneys’ fees, or costs.
So, what does this mean for employers? Senate Bill No. 699 expands the ways in which employees can challenge noncompete agreements in California, allowing them to recover either injunctive relief and/or actual damages as well as costs and fees. The viability of employee non-solicitation agreements remains unclear and may also face additional challenges under Senate Bill No. 699. What’s next in California? The state is also considering Assembly Bill 1076, which would require employers to proactively inform current as well as former employees in writing (via mail and email) by February 14, 2024, that any noncompete provisions they have signed are void.
Colorado’s Restrictive Employment Agreements Act, effective August 10, 2022, limits enforceable noncompete provisions to “highly compensated” employees. The “highly compensated” threshold is calculated at the time the restrictive covenant is signed and at the time the covenant is enforced. Non-solicitation provisions have a slightly lower monetary cutoff (at least 60% of the highly compensated threshold). Colorado also requires employers to provide notice to prospective employees before they accept an offer of employment and to current employees at least 14 days before the effective date of any additional consideration for the restrictive covenant. The notice must be clear and conspicuous, provided in a separate document, and signed by the employee or prospective employee. Additionally, the notice must (1) identify the restrictive covenant agreement by name; (2) state the that the agreement contains a covenant not to compete that could restrict the employee’s options for subsequent employment following separation from the employer; (3) identify where in the agreement the noncompete provision is located; and (4) provide a copy of the agreement.
District of Columbia
Effective September 21, 2022, the District of Columbia’s “Non-Compete Clarification Amendment Act of 2022” prohibits employers from entering into noncompete provisions (defined as “a provision in a written agreement or workplace policy” “that prohibits an employee from performing work for another or from operating the employee’s own business”). With the amendment, D.C. bans noncompetes for employees with the exception of “medical specialists” (who earn at least $250,000 annually) or “highly compensated individuals” (expected to earn $150,000 or more annually). This number will change in 2024 depending on the Department of Labor’s Consumer Price Index. Non-highly compensated individuals who are covered by the amendment include employees who either spend (or are anticipated to spend) more than half of their time working in D.C. or, if their employment is based in D.C., regularly spend (or are anticipated to spend) a substantial amount of work in D.C. and not more than half of their work time for the employer in another jurisdiction. Additionally, the amendment includes notice requirements for employers, who must provide new employees with the noncompete agreement at least 14 days prior to the beginning of employment or, for existing employees, at least 14 days before the employer requires the employee to sign the agreement. The employer must also provide a notice to the employee that states: “The District of Columbia Ban on Non-Compete Agreements Amendment Act of 2020 limits the use of non-compete agreements. It allows employers to request non-compete agreements from ‘highly compensated employees’ under certain conditions. [Name of employer] has determined that you are a highly compensated employee. For more information about the Ban on Non-Compete Agreements Amendment Act of 2020, contact the District of Columbia Department of Employment Services (DOES).”
So, What Next?
Employers should remain vigilant and continue to reexamine any noncompete provisions they employ, as well as take a close look at what employees are subject to these provisions to ensure their continued enforceability.