California non-compete agreements may be allowed in certain circumstances

On Behalf of | May 10, 2022 | Firm News | 0 comments

There are so many facets to owning a business. Overhead costs including supplies, building maintenance, and utility bills are among the long list business owners are obligated to pay for. Another important part involves the aspects of employees and employment law.

Non-compete agreements

Many business owners opt to initiate non-compete agreements for their employees. A non-compete agreement is a contract whereby an employee basically agrees to refrain from working for another competitor or starting their own similar operation for a certain time period and in a certain place in the event the employee leaves the company.

These types of contracts are beneficial for employers who want to prevent prior employees from essentially from taking away business if they leave.

Different states have different stipulations surrounding the use and scope of non-compete agreements and, in fact, some jurisdictions ban them almost completely – like California.

Non-compete agreements in California

Under California law, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” However, there are 3 exceptions to this prohibition.

Exception 1: Partnerships

When individuals form a partnership, California allows the use of non-compete agreements when the partnership dissolves or one partner splits ways. In general terms, the law says the agreement can limit a departing partner from carrying on a similar business in a certain jurisdiction where the business of the existing partnership still operates.

Exception 2: LLCs

California also allows non-compete agreements for members of an LLC.

In the event of a dissolution, the agreement can prevent a member of an LLC who has left from operating a similar business of the LLC in the same area.

Exception 3: Sale of a business

When it comes to selling a business, California law allows the parties to include stipulations and agree to not compete. Essentially, the law says a contract where the seller of the entity agrees to refrain from competing in a similar business after the sale in the same location is acceptable.

More information about employment contracts

It should also be noted that California law does not ban covenants in an employment contract whereby the employee is barred from competing with the employer during the term of the employment.

Also, businesses participating in a joint venture may agree not to compete with one another – although before entering into the joint venture contract, the parties will want to have the risk of exposure to liability for engaging in unlawful business practices (e.g., antitrust laws) evaluated by their legal team.

The above is a general overview of when non-compete agreements are allowed in California. However, each situation will differ and anyone considering a non-compete agreement for an employee, partnership or LLC is encouraged to consult with an attorney who has knowledge in this area to ensure proper language is included and the overall agreement holds up in court.