Are contract-based non-solicitation of employee agreements enforceable in California?

Are non-solicitation of employee agreements enforceable in California?

No. Under California Business and Professions Code Section 16600, non-solicitation of employee agreements are generally unenforceable and void. California maintains a strong public policy favoring employee mobility and open competition, which prohibits contractual provisions that prevent former employees from recruiting their former colleagues.

The Legal Foundation: Business and Professions Code Section 16600

California’s stance on restrictive covenants is among the most stringent in the United States. Section 16600 states 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.' While this was historically applied to non-compete agreements, recent judicial interpretation and legislative updates have solidified its application to non-solicitation of employees.

The Evolution of Case Law

For years, employers attempted to distinguish between 'non-competes' and 'non-solicitation' clauses. However, the landmark case Edwards v. Arthur Andersen LLP (2008) signaled that California courts would not tolerate narrow restraints on trade. More recently, the 2023 legislative updates (SB 699 and AB 1076) have removed any ambiguity, explicitly stating that non-compete clauses—and by extension, restrictive covenants that function as such—are unenforceable regardless of where the contract was signed.

Key takeaway: If your contract contains a clause prohibiting an employee from soliciting other staff members to leave, that clause is likely void under California law and could expose your company to legal liability.

Action Item: Audit your existing employment agreements to identify and remove any language that restricts an employee's ability to recruit or hire former colleagues.

Recent Legislative Updates: SB 699 and AB 1076

California has doubled down on its anti-restraint policy with two critical pieces of legislation that took effect on January 1, 2024.

• SB 699: This law makes it a civil violation for an employer to enter into or attempt to enforce a void non-compete or non-solicitation agreement. It allows employees to sue for injunctive relief and actual damages.
• AB 1076: This law requires employers to provide written notice to current and former employees (employed after January 1, 2022) that any non-compete or non-solicitation clauses in their agreements are void.

Comparison of Restrictive Covenants in California

Action Item: If you have employees who signed agreements after January 1, 2022, ensure you have issued the required notice under AB 1076 to avoid statutory penalties.

Exceptions and Nuances

While the general rule is that these clauses are void, there are extremely narrow exceptions where restrictive covenants may survive scrutiny, though these rarely apply to standard employment contracts.

• Sale of a Business: Under BPC 16601, a seller of a business may agree to a reasonable non-solicitation or non-compete clause to protect the value of the goodwill being sold.
• Dissolution of a Partnership: Under BPC 16602, partners may agree to refrain from carrying on a similar business within a specified geographic area upon dissolution.
• Trade Secret Protection: While you cannot prevent an employee from soliciting others, you can still enforce confidentiality agreements to prevent the misappropriation of proprietary information or trade secrets.

Action Item: Do not rely on the 'sale of business' exception for standard employment agreements; it is highly fact-specific and requires a bona fide ownership interest.

Risks of Non-Compliance

Attempting to enforce a void non-solicitation clause is no longer just a matter of a judge striking the clause from the contract. It now carries significant financial and legal risk:

1. Civil Litigation: Employees can sue for damages and attorney fees.
2. Unfair Competition Claims: Attempting to enforce void clauses can be classified as an unfair business practice under the California Business and Professions Code Section 17200.
3. Regulatory Scrutiny: The California Attorney General has increased focus on companies that use 'shadow' non-competes to intimidate employees.

Key takeaway: The cost of defending a lawsuit regarding an unenforceable clause far outweighs the perceived benefit of including it in your standard contract template.

Action Item: Consult with local employment counsel to draft 'severability' clauses that protect the remainder of your contract should a specific provision be challenged.

Streamlining Compliance with TermScore

Managing contract compliance across a large workforce is complex, but you don't have to do it manually. TermScore uses advanced AI to automatically scan your employment agreements, identifying unenforceable non-solicitation clauses and flagging them for immediate review. By integrating TermScore into your legal workflow, you can ensure your contracts remain compliant with the latest California statutes, reducing your litigation risk and protecting your company’s reputation.