Updated January 18, 2023
A California non-compete agreement prohibits a person from engaging in a similar business for a specific duration and geographic area. A non-compete is enforceable only to a seller of the goodwill of a business in its entirety. Employees, independent contractors, and remote workers are strictly forbidden from entering into a non-compete.
Statutes – Sections 16600-16607 (Business and Professions Code)
Laws
Legally Enforceable?
A California non-compete is not enforceable to:
- Employees
- Remote workers
- Independent contractors
A California non-compete is enforceable to:
- Seller of goodwill of a business
- Partners involved in the dissolution of a partnership
Employees
A non-compete made with an employee is unenforceable. The statute specifically restricts, in any way, an individual’s ability to work in a specific industry.
“Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
Source: BPC § 16600 & Edwards v. Arthur Andersen LLP (2008)
Remote Workers
A California company cannot make the governing law in a non-compete to be in another State to get around State law. If the company is located in California, the remote worker will have the same protections as a resident
Source: Application Group, Inc. v. Hunter Group, Inc. (1998)
Independent Contractors
Independent contractors are ineligible to enter into a non-compete and falls under the same category as employees under the statute.
Source: BPC § 16600
Sale of a Business
A non-compete is enforceable against a seller that sells the goodwill of a business (corporation, LLC, partnership, etc.) that agrees to sell to a buyer that carries on the business therein.
The seller must “refrain from carrying on a similar business within a specified geographic area in which the business is so sold.”
Required Language: The law states specifically that it is for the “goodwill” of a business. Therefore, it is required to use the term “goodwill” in a purchase agreement or non-compete.
Source: BPC § 16601
Dissolution of Partnership
The partners of a dissolving partnership can agree to sign a non-compete amongst themselves to prohibit one another from opening a similar business in the same area. The agreement should include a specific geographical area and duration.
Source: BPC § 16602
Penalties
If an employer includes a non-compete clause into an ineligible employee’s contract for employment, they will be penalized $100 for each pay period for the initial violation and $200 for each pay period thereafter.
Source: LAB § 2699(f)(2)
Maximum Term
5 years has been determined to be reasonable for a non-compete for the sale of a business covering the entire State of California.
Source: Alliant Ins. Services, Inc. v. Gaddy (2008)
Blue Penciling
California courts will not amend a non-compete agreement that is too broad or if the terms are unreasonable.
“Courts reform contracts only where the parties have made a mistake, and not for the purpose of saving an illegal contract.”
Source: Kolani v. Gluska (1998)