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Contracts in business law: non-compete agreements

In just about every industry across the nation, employees are required to sign a number of legal documents before they can start their first day of work. From income tax forms to a standard employment contract, these legal documents not only hold an employee responsible for following the law but employers as well.

But one particular part of an employment contract called a non-compete clause has been thrust into the national spotlight as politicians across the country ask federal agencies to consider the use of such restrictive covenants in the workplace. Some of our California readers may have heard about this issue as it applies to employees with the sandwich chain Jimmy John's.

So what are non-compete agreements and are they something that could cause issues for businesses here in California?

A non-compete agreement is a contract between an employer and its employees that typically prohibits a terminated employee from working for a competitor or soliciting business from current clients for a specified period of time. The purpose of these agreements is to protect trade secrets that may give a company a competitive edge they do not want to give to their rivals.

Although non-compete agreements are enforceable in many states, the same is generally not true here in California. Under Section 16600 of the California Business and Professions Code, the use of non-compete agreements is prohibited, even if the contract is considered to be "reasonably limited in time and geographic scope." (There is an exception for non-competes covenants associated with the sale of a business.)

Because non-compete covenants are void in our state, an employer could find themselves facing civil litigation in the event that they fire an employee who refuses to sign such an agreement. It is important to point out, however, that non-compete agreements should not be confused with nondisclosure agreements, which are allowed in our state and will be the topic of conversation in next week's blog post.

Sources: The American Bar, "California Law on Restrictive Covenants and Trade Secrets," Accessed Oct. 22, 2014

The Entrepreneur, "Noncompete Clause," Accessed Oct. 22, 2014

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