California business owners face a critical challenge when structuring employment contracts. While non-compete agreements remain standard practice across most states, California maintains one of the nation's strictest prohibitions against these restrictive covenants. The confusion surrounding non-compete enforceability has intensified with recent legislative changes that create significant liability risks for employers who fail to update their employment agreements.
The stakes have never been higher for California employers. New enforcement mechanisms under SB 699 and AB 1076 have transformed what was once merely unenforceable contract language into a potential source of expensive litigation. These laws grant employees powerful new tools to challenge non-compete provisions, including the right to recover attorney's fees and pursue claims against out-of-state employers. Business owners who haven't reviewed their employment contracts recently may unknowingly expose themselves to lawsuits simply by using outdated agreement templates.
For businesses operating in California or employing California residents, understanding these requirements isn't optional. The changes effective in 2026 demand immediate attention to employment contracts, handbooks, and hiring practices. This comprehensive guide examines California's non-compete prohibition, recent legislative updates, and practical steps employers must take to protect their businesses while remaining compliant.
California's Ban on Non-Compete Agreements Under B&P §16600
California Business and Professions Code Section 16600 establishes one of the country's most comprehensive prohibitions against non-compete agreements. The statute states plainly 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." This straightforward language has profound implications for how California employers structure their employment relationships and protect legitimate business interests.
The California Supreme Court has consistently interpreted Section 16600 broadly, rejecting attempts to create exceptions or apply reasonableness tests that other states commonly use. Unlike jurisdictions that evaluate non-competes based on geographic scope, duration, or competitive harm, California courts void these provisions outright. This approach reflects California's strong public policy favoring employee mobility and open competition, principles that have contributed to the state's reputation as a hub for innovation and entrepreneurship.
The prohibition extends far beyond traditional employment contracts. Courts have struck down non-compete provisions in independent contractor agreements, partnership agreements, and even settlement agreements resolving employment disputes. The ban applies equally to all industries, from technology and healthcare to retail and professional services. Whether dealing with entry-level employees or C-suite executives, California employers cannot enforce agreements that prevent former employees from working for competitors or starting competing businesses.
Recent court decisions have expanded the scope of Section 16600 to cover various forms of indirect restraints on employment. Provisions that penalize employees for joining competitors, such as forfeiture clauses that eliminate vested benefits or require repayment of bonuses, may violate California law even without explicit non-compete language. Courts examine the practical effect of contract terms rather than their labels, invalidating provisions that effectively discourage employees from pursuing opportunities with competitors.
Key Legal Updates Impacting Employers in 2026
SB 699 — Enforcement Beyond State Borders
Senate Bill 699 fundamentally changed the enforcement landscape for non-compete agreements in California. Beginning January 1, 2024, this law created a private right of action allowing current and former employees to sue employers who attempt to enter into or enforce void non-compete agreements. This legislation marks a significant shift from the previous framework, where non-competes were simply unenforceable but didn't necessarily trigger liability for employers who included them in contracts.
The law's reach extends well beyond California's borders, creating challenges for multi-state employers. SB 699 explicitly covers agreements signed outside California and applies to any employer attempting to enforce a non-compete against an employee working in California. This means a New York company with California-based remote workers could face lawsuits in California courts for non-compete provisions that might be valid under New York law. The statute provides powerful remedies for employees, including injunctive relief, actual damages, and reasonable attorney's fees and costs.
The practical implications of SB 699 require employers to reconsider their entire approach to restrictive covenants. Companies can no longer rely on choice-of-law provisions to circumvent California's prohibition. Even sending a cease-and-desist letter to a former employee in California based on an out-of-state non-compete agreement could trigger liability. Employers must carefully evaluate their workforce locations and ensure compliance with California law for any employee who performs work within the state, regardless of where they were hired or where the company maintains its headquarters.
AB 1076 — Mandatory Notice Requirements for Employers
Assembly Bill 1076 adds another layer of compliance obligations for California employers. Effective February 14, 2024, this law requires employers to provide written notice to current and former employees that any non-compete clauses or agreements are void and unenforceable. The notice requirement applies to all employees who were employed after January 1, 2022, and had employment agreements containing non-compete provisions, regardless of whether those provisions were ever enforced.
The timeline for compliance creates urgency for employers who haven't yet addressed these requirements. Employers must provide notice to current employees by February 14, 2024, and to former employees who separated after January 1, 2022. The notice must be individualized and delivered through methods reasonably calculated to reach the recipient, such as email to the last known email address or mail to the last known physical address. Generic announcements or updates to employee handbooks don't satisfy this requirement.
Failure to comply with AB 1076's notice requirements exposes employers to potential penalties and creates evidence of willful violations that could support employee lawsuits. The law doesn't specify exact penalty amounts, but the California Labor Commissioner has broad enforcement authority. More concerning for employers, non-compliance could strengthen employee claims under SB 699, potentially supporting arguments for enhanced damages or attorney's fees based on the employer's knowing violation of California law.
Increased Attorney's Fees Exposure
The combination of SB 699 and AB 1076 significantly increases the financial risks associated with non-compete provisions. The availability of attorney's fees fundamentally changes the economics of non-compete litigation, making it financially viable for employees to challenge even technical violations. Previously, the cost of litigation often exceeded potential recovery, discouraging lawsuits over unenforceable provisions. Now, successful employees can recover their full attorney's fees, creating strong incentives for litigation.
This fee-shifting provision particularly threatens small and medium-sized businesses that may lack the resources for protracted litigation. A single employee's successful challenge could result in six-figure attorney's fee awards, even when actual damages are minimal. The prospect of paying opposing counsel's fees also strengthens employees' negotiating positions in settlement discussions, potentially forcing employers to pay substantial sums to resolve claims rather than risk adverse judgments.
What Employers Can Still Restrict Legally
Confidentiality and Trade Secret Protection
While California prohibits non-compete agreements, employers retain significant rights to protect confidential information and trade secrets. The California Uniform Trade Secrets Act provides robust remedies against misappropriation, including injunctive relief and damages. Properly drafted confidentiality agreements remain fully enforceable when they protect legitimate proprietary information rather than general knowledge or skills acquired through employment.
The key to enforceable confidentiality provisions lies in their scope and specificity. Agreements must clearly define what constitutes confidential information, limiting protection to genuinely proprietary materials such as customer lists, pricing strategies, technical specifications, and business plans. Courts scrutinize broad definitions that could encompass publicly available information or general industry knowledge. Employers strengthen their position by implementing clear policies for handling confidential information, including marking documents as confidential and limiting access on a need-to-know basis.
Trade secret protection offers particularly powerful remedies for employers facing unfair competition from former employees. California courts will enjoin former employees from using or disclosing trade secrets, even when doing so effectively prevents them from working for competitors. However, employers must demonstrate that the information qualifies as a trade secret under statutory criteria, including that it derives economic value from secrecy and that the employer took reasonable measures to maintain confidentiality. This requires proactive measures such as password protection, confidentiality training, and exit interview procedures that remind departing employees of their ongoing obligations.
Narrow Non-Solicitation Provisions
The enforceability of non-solicitation agreements in California remains a complex and evolving area of law. While courts generally void broad restrictions preventing employees from soliciting customers or coworkers, narrowly tailored provisions protecting specific legitimate interests may survive scrutiny. The distinction often turns on whether the provision protects confidential information or trade secrets versus imposing a general restraint on competition.
Customer non-solicitation provisions face particular challenges under California law. Courts have invalidated agreements that broadly prohibit contact with customers, viewing them as improper restraints on employee mobility. However, provisions that specifically prohibit using confidential customer information to solicit business may be enforceable. For example, an agreement preventing a former employee from using proprietary customer contact lists or exploiting confidential knowledge about customer preferences and purchasing patterns stands a better chance of enforcement than a blanket prohibition on customer contact.
Employee non-solicitation provisions encounter similar scrutiny but may fare slightly better when carefully drafted. California courts have occasionally upheld narrow provisions preventing former employees from recruiting colleagues when the restriction protects legitimate interests beyond mere competition. Factors supporting enforceability include short duration limits, restrictions tied to confidential information about employee compensation or performance, and evidence that the departing employee engaged in improper pre-departure recruiting activities. Nevertheless, employers should approach employee non-solicitation provisions cautiously, recognizing that California courts remain skeptical of any restrictions on employee mobility.
Sale-of-Business Exceptions
California law recognizes limited exceptions to the non-compete prohibition in connection with business sale transactions. Business and Professions Code Sections 16601, 16602, and 16602.5 permit reasonable non-compete agreements when someone sells their ownership interest in a business entity, dissolves a partnership, or dissociates from a limited liability company. These statutory exceptions reflect the different policy considerations at play when business owners voluntarily exit their ventures for valuable consideration.
The sale-of-business exception requires careful attention to statutory requirements and limitations. Section 16601 allows buyers to protect their investment by preventing sellers from competing within specified geographic areas where the business operated. However, the non-compete must be ancillary to a legitimate sale of goodwill or ownership interests. Courts reject attempts to disguise employment relationships as ownership transfers or to extract non-compete agreements without meaningful consideration. The geographic scope must also remain reasonable, limited to areas where the sold business actually operated rather than blanket statewide or national restrictions.
These exceptions apply primarily to substantial ownership interests rather than token equity grants used to circumvent the non-compete prohibition. California courts examine the economic realities of transactions, looking for genuine transfers of business ownership rather than employment relationships dressed up as equity arrangements. Employers cannot avoid Section 16600 by granting minimal equity stakes to employees and then claiming the sale-of-business exception when those employees depart. The exception protects legitimate business acquisitions where buyers need assurance that sellers won't immediately compete using the very goodwill and customer relationships they just sold.
Using Non-Compete Language in 2026 Can Still Lead to Liability
The mere inclusion of non-compete language in employment agreements now creates liability risks, even when employers never attempt enforcement. Under SB 699, the act of entering into a void non-compete agreement constitutes a violation, regardless of subsequent enforcement efforts. This means employers using standard multi-state employment agreements or outdated California templates face potential lawsuits simply for presenting these agreements to employees.
Hidden non-compete provisions pose particular dangers for unwary employers. Courts look beyond contract labels to examine practical effects, invalidating provisions that indirectly restrain employment. Common examples include excessive garden leave provisions that pay departing employees to refrain from working, forfeiture clauses eliminating vested benefits for competitive activity, and training repayment agreements with unreasonable terms. Even confidentiality agreements drafted too broadly can cross into prohibited non-compete territory when they effectively prevent employees from working in their field.
Litigation risks multiply when employers fail to audit existing agreements and policies. Each employee hired under a problematic agreement represents a potential plaintiff, and class action attorneys have begun targeting companies with standardized agreements containing void provisions. The availability of attorney's fees makes these cases attractive for plaintiff's counsel, who can pursue claims on behalf of multiple employees sharing similar agreements. Employers must proactively identify and eliminate problematic language rather than waiting for lawsuits to expose violations.
How Employers Should Update Contracts and Policies in 2026
Comprehensive contract review represents the first critical step in achieving compliance. Employers should examine all employment-related agreements, including offer letters, employment contracts, confidentiality agreements, equity award agreements, and separation agreements. The review must encompass both current templates and existing agreements with active employees. Special attention should focus on identifying indirect restraints that courts might construe as non-competes, such as overly broad confidentiality provisions or punitive forfeiture clauses.
Employee handbook updates require equal attention to detail. Many handbooks contain outdated language referencing non-compete obligations or suggesting that employees cannot work for competitors. These provisions must be removed or revised to reflect California law accurately. Handbooks should affirmatively state that the company does not require non-compete agreements and that employees remain free to pursue any lawful employment after leaving the company. Including clear statements about what restrictions do apply, such as obligations regarding confidential information and trade secrets, helps set appropriate expectations while avoiding legal exposure.
The revision process should strengthen permissible protections while eliminating problematic restrictions. Rather than relying on unenforceable non-competes, employers should focus on robust confidentiality agreements, appropriate invention assignment provisions, and clear policies regarding trade secret protection. Consider implementing garden leave provisions that comply with California law, paying departing employees during notice periods without restricting future employment. Strengthen onboarding and exit procedures to document confidential information access and remind employees of continuing obligations.
Training hiring managers and human resources personnel ensures consistent implementation of updated policies. Staff involved in recruiting and onboarding must understand that they cannot present non-compete agreements or suggest that employees will face restrictions on future employment. Develop clear talking points for discussing permissible restrictions on confidential information use while avoiding statements that could imply non-compete obligations. Regular training updates help maintain compliance as staff changes and laws evolve.
Securing Your Business Within California's Legal Framework
California's prohibition on non-compete agreements demands a fundamental shift in how employers approach workforce management and competitive protection. The recent legislative changes through SB 699 and AB 1076 transform what was once merely unenforceable contract language into a source of significant liability. Business owners can no longer afford to treat non-compete provisions as harmless placeholders or rely on out-of-state law to govern California employees.
The path forward requires immediate action on multiple fronts. Employers must audit existing agreements, provide required notices to current and former employees, and revise templates to eliminate problematic provisions. These steps go beyond simple deletion of non-compete clauses to encompass a thorough review of all restrictive covenants and their potential interpretations under California law. The investment in compliance pays dividends by avoiding costly litigation and preserving the company's ability to protect legitimate business interests through enforceable means.
Success in this environment comes from understanding what protections remain available and implementing them strategically. While non-compete agreements are void, properly structured confidentiality agreements, trade secret protections, and narrow non-solicitation provisions tied to legitimate business interests can still provide meaningful protection. The key lies in working with experienced counsel who understands the nuances of California employment law and can craft agreements that maximize protection while minimizing legal risk. Business owners facing questions about non-compete agreements or needing to update their employment contracts should act quickly to ensure compliance. Contact LawPLA's employer defense team for a comprehensive review of your employment agreements and policies. Our business litigation attorneys understand the complexities of California's non-compete laws and can help you protect your business interests while avoiding costly compliance failures. Don't wait for a lawsuit to discover problems with your employment agreements. Schedule a consultation today to ensure your business meets all current legal requirements while maintaining strong protections for your confidential information and customer relationships.