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New California Law Can Stop Massachusetts Non-Compete Agreements

· Employment,Non-compete,Arbitration

Employers often put non-compete and non-solicitation provisions into agreements with employees. These provisions restrict the employee from competing with the employer's business, even after employment is terminated. 

In Massachusetts, courts routinely enforce non-compete and non-solicitation agreements, so long as they are reasonable in scope, are necessary to protect a legitimate interest of the employer, and the employee has received consideration for signing the agreement.

Other states view these restrictive covenants with a more jaundiced eye. In California, for example, they are void as a matter of law. So naturally, out of state employers who employ California employees often insert choice of law and choice of venue provisions in their employment agreements, so that the law of the employer's home state governs and even a California employee could be considered bound by non-compete and non-solicitation provisions.

But a new law in California, California Labor Code Provision 925, which takes effect January 1, 2017, largely outlaws this practice. The law provides that employees who primarily work and live in California can no longer be required by employers to sign agreements that require adjudication of claims to be decided in a non-California forum or with non-California law. The provision is intended to ensure that employees working in California are not deprived of the “substantive protection of California law with respect to a controversy arising in California.”

The law allows an employee to void out any contract provision that contains non-compete or non-solicitation provisions. Presumably, such requests would be the norm if out-of-state employers continue to include choice of law and choice of forum provisions in contracts with California employees, even if those provisions relate to mandatory arbitration.

One exception to the enforceability of Section 925 may prove to be important - it does not apply to a "contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied."

Massachusetts-based companies that employ California-based employees should pay close attention to Section 925. To the extent the company deems a choice of law or choice of venue provision important, and given the vast differences between the laws of the states, it should consider, if practical, requiring a prospective employee to retain counsel to negotiate the terms of an employment agreement. Presumably, any such costs incurred by a prospective employee could be reimbursed by the Massachusetts company upon hiring.

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