Can California businesses still use restrictive covenants?

Restrictive covenants can serve as powerful additions to modern contracts. Instead of imposing obligations on either party, restrictive covenants instead aim to prevent certain types of conduct.

Noncompete agreements are popular among employers when hiring workers who may have access to trade secrets. Nonsolicitation agreements are also common in employment contracts, vendor agreements and partnership contracts. Employers may require that workers sign nondisclosure agreements during hiring or after their termination.

Restrictive covenants have seen significant pushback at both the state and federal levels in recent years. Can companies in California still use restrictive covenants in their contracts?

State law limits restrictive covenants

California has more limitations in place regarding restrictive covenants than most other states. Currently, federal law does not prohibit the use of restrictive covenants in employment contracts, but California has stricter standards in place, especially with regard to employment contracts.

Employers generally cannot enforce noncompete agreements or nonsolicitation agreements integrated into standard employment contracts. However, these restrictive covenants may be enforceable contract inclusions after a partnership buyout. Contracts with vendors and service providers could also include nonsolicitation agreements to limit the loss of key talent and protect client relationships.

Nondisclosure agreements, or confidentiality agreements, are also subject to restrictions, although they can be enforceable in many situations. The state does not allow for their enforcement in scenarios involving misconduct in the workplace.

There are workarounds available in scenarios where standard restrictive covenants may not be an option. Companies can draft contracts that protect their interests, including their trade secrets. Partnering with a business law professional can help business leaders and owners optimize organizational protection and enforce existing contracts.