Can California employers still use restrictive covenants?

On Behalf of | Jun 3, 2024 | Business Law |

Employment contracts establish expectations for an employer and the new worker accepting a position at the company. Businesses often include a variety of terms intended to protect the organization from liability. By clarifying the compensation that the company intends to provide for a worker, for example, an employment contract can reduce the likelihood of workers suing out of unmet expectations. Companies can make it quite clear when they can terminate workers and what, if any, severance package the worker may receive.

Employers may also include terms that aim to prevent a worker from unfairly competing with the company in the future. Restrictive covenants can limit the economic activity of workers after they leave a job, which makes them popular in employment contracts.

What are restrictive covenants?

Restrictive covenants are effectively contract inclusions that limit certain conduct. There are three common restrictive covenants that employers have long used to protect against employee misconduct.

Non-compute agreements prevent workers from taking a job at a competing company or starting their own business in the same industry. Non-solicitation agreements prevent attempts to hire former coworkers or do business with clients or customers that someone knows through their employment.

Non-disclosure agreements prevent people from sharing non-public information about the company or their employment there. Generally, restrictive covenants need to have clear terms and limitations included if employers want them to be enforceable.

Are restrictive covenants enforceable in California?

There are some restrictive covenants that employers can use to protect against worker misconduct in California. However, there are rules limiting the use of certain restrictive covenants.

There is now a federal ban on non-compete agreements in employment contracts, but California had already established that policy long before the Federal Trade Commission (FTC) did. California also has rules limiting non-disclosure agreements when they relate to misconduct that a worker experienced. There are some scenarios in which carefully-drafted restrictive covenants could help enhance California employment contracts.

Highly-specific terms are important in any employment contract, especially those involving executives another high-ranking positions within the company. Including the right details in an employment contract can mitigate much of the risk that comes from hiring. Organizations may need to revisit their existing contracts or draft entirely new ones as the law continues to change.