Companies Must Notify Employees in California About Void Noncompetes

Back in March 2022, the attorney general of California issued an alert reminding employers that noncompete agreements are not enforceable in the state. Now, companies with employees in California need to pay attention to Assembly Bill 1076, which takes this prohibition a step further.

The new law requires companies to send notices to current and former employees who have noncompete or nonsolicitation provisions in their employment context, making it clear that those provisions are void. These notifications, which need to be sent out before February 14, 2024, must be sent out to both the employee’s last known postal address AND email address.

A noncompete is a contractual agreement between an employee and employer that restricts the employee’s ability to engage in competitive activities post-employment, usually within a specific geographic area and for a certain period after leaving the company. This can include a prohibition on working for the company’s competitor. Noncompetes are intended to protect a company’s business interest by preventing employees from using the knowledge they gain at the company for a competitor. A sales employee may, for example, have learned and maintained a list of key sales contacts, pricing strategies and product specifications that she can then use or give to her next employer.

A nonsolicitation clause is a contractual agreement between an employee and employer in the employee context that restricts an employee from soliciting or poaching the employer’s clients or employees. Generally, these provisions are for a specified period after the termination or expiration of their employment. For instance, a newly departed salesperson may be prohibited from reaching out to their former clients for a period of one year post-employment. It prevents a company’s competitors from hiring their opponents’ salespeople to poach their clients.

Despite valid business reasons to having provisions, there are concerns that these clauses hinder employee mobility and the market for talent, including preventing wage growth. Therefore, California made it unlawful for employers to include post-employment noncompetes in an employment agreement or attempt to enforce these provisions.

This new law takes additional steps by mandating that companies notify both current and former employees that noncompete provisions in their employment agreements are void. This law also seems highly likely to apply to nonsolicitation clauses of both clients and employees.

Time for action

To comply with this law, companies should take the following steps:

1. Under legal privilege audit, companies should determine whether they have noncompete or nonsolicitation clauses in employment agreements or offer letters of current and former employees in California who were employed after January 1, 2022. This may include employees who may have been employed by the company in another state but moved to California after January 1.
2. Attorneys may want to review the nonsolicitation and noncompete provisions to determine if they are subject to exceptions under this law, in particular for certain high-level employees. In-house counsel may want to seek expert help from outside counsel since there are few exceptions.
3. Companies must then draft and send out individualized written notices to all current and former employees of the company before February 14, 2024, stating that any post-employment noncompete clauses and nonsolicitation clauses contained in employment agreements or offer letters are void.  As stated earlier in this article, notices must be sent out to both the employee’s last known postal address and email address.

A company may face civil penalties for not providing the notice.

Companies should also keep an eye out for further guidance on this law as there are some open questions. For instance, there is contradicting legal advice from law firms as to whether companies even need to send out a notice regarding nonsolicitation clauses. Most seem to agree that provisions around nonsolicits of clients are void and companies should send out a notice. Others indicate that the law only covers nonsolicitation of clients- but not employees.

Despite this conflicting advice, general counsel should consider whether they want to take the risk of not sending out a notice now regarding nonsolicits, only to potentially be required to do so later should the legislator release guidance around this notice requirement. Another open question is whether contractors fall under this notice requirement. It’s important that general counsel continue to rely on outside counsel, law firm alerts and their networks to learn more about this law.