The California Employer’s Guide to Non-Competition Provisions

After months, if not years, of investing important time and money in training and developing your workers’ talents, you obviously do not want a rival to gain from the development of those skills and knowledge. Employers in California confront an uphill fight in preventing former workers from moving their valuable knowledge and technology to another competition or launching a competing firm.

The bad news is that California forbids almost all non-compete agreements, with a limited exemption for those who possess a stake in the company or its goodwill. However, the non-compete provision’s aim may still be met.

Leaves from the Garden

In recent years, a relatively new notion known as “garden leave” has gained favour in the United States, especially California. A garden leave clause often states that, in exchange for higher salary, the employee agrees to:

remain at home instead of looking for new work, or

Assist the employer during a transition time while the employer is training a successor or taking additional steps, i.e. phasing out the job.

This transition phase is typically brief—between three and six months. The ex-employee will do one of two things:

get a lump sum payment equal to his or her income during this transitional period, or

During the changeover phase, will remain on the payroll and receive benefits.

It is critical to emphasise to the employee and in the agreement that this extra payment is just for the brief transition time and does not form part of any ordinary salary or severance package provided as part of the regular employment agreement.
While garden leave has had mixed success in California, courts have typically sustained such clauses if the employment limitation did not continue beyond this brief transition time, independent of any additional money.

Confidentiality clauses and non-disclosure agreements may both achieve the same result.

While a non-compete clause is still unenforceable in California, you may take actions to preserve your personal information and trade secrets that accomplish the same thing. While there are some exceptions to the rules prohibiting the disclosure of confidential information and trade secrets, such as when the information is already known to the public or has been disclosed by a third party, these provisions effectively prevent an employee from sharing your protected information with a new employer or using it to start a new business.

For the purposes of a bootstrapped non-compete clause, the confidential information and trade secrets protected by such a provision or agreement should define particular categories of your information, rather than an umbrella provision that embraces all potential forms of protectable information. Personal and financial customer data, vendor information, corporate procedures and processes, source code, research and product development, and the like are examples of particular forms of protectable information.

Last Thoughts

Garden leave clauses are often confined to employment agreements with corporate leaders and high-level staff, since it would be prohibitively expensive to pay every person to remain at home for a few months once employment is terminated. Furthermore, garden leave compensation must be more than a symbolic sum. There must be adequate extra remuneration traded for the employee giving up the opportunity to seek new employment, especially in industries where a few months out of work might render the person obsolete. If the court determines that the extra payment is only a token amount, the condition will be declared invalid as an unenforceable non-compete provision, and you may find yourself on the receiving end of a lawsuit.

At the end of the day, you do not need to limit an employee’s ability to work in a certain industry in order to preserve your sensitive information and intellectual property. Other legal tools, such as including a confidentiality provision in the employment agreement or having the employee sign a non-disclosure agreement, effectively limit the information the former employee may share with a new employer and create legal liability for any new employer that uses your protected information.