Employment Agreements in California – An Overview
Employment contracts have been a longstanding practice of California law. They serve to provide clear expectations and responsibilities for both the employer and the employee. Employment contracts are generally subject to the ordinary rules governing contracts, including mutual consent to the terms, an adequate description of the terms, and some consideration moving from one party to another.
The general rule is that an employment contract exists when any offer by the employer is accepted by a current employee or by an applicant for employment. For instance , an employment contract is created when an applicant for employment agrees to the standard terms of employment after being offered the position. This is particularly true when the employee is otherwise employed "at will" and the offer is for something beyond the standard terms of employment.
While there are a variety of employment contracts-such as express or implied contracts, written or oral contracts, and enforceable or unenforceable contracts-the former creates an implied contract when the employer implements a policy that creates a form of compensation or employment commitment that goes beyond the standard terms of employment. For example, a benefit plan that is offered to all employees or conditions of employment that are not previously disclosed may create an implied contract.
The Law Regarding Employment Contracts in California
The enforceability of employment contracts in California is governed by a combination of the California Labor Code, common law principles, and various judicial decisions. Collectively, these components create a legal framework that detailed the specific requirements that must be satisfied for employment contracts to be considered valid and enforceable.
At the core of the California Labor Code are §§ 1668 and 1670, which establish that contracts that restrain someone from exercising their legal profession or trade are considered unlawful, subject to the exceptions in § 1668. Specifically, § 1670(a) allows for contracts in which one confines another "to the performance of an agreement to refrain from engaging in a lawful profession, trade, or business of any kind, other than the use of the special skills or services of the person who is to render services," as long as the relevant circumstances show that the limitation is reasonable and does not impose an undue hardship on the person providing the services.
Aside from the provisions in the California Labor Code, the opinions issued by the California courts appear to be the primary source of law pertaining to the enforceability of employment contracts. For example, in Karp v. County of Santa Clara (2003) 108 Cal.App.4th 106, the plaintiff sought to enforce an employment contract that imposed a specific term of years when neither party intended to be bound to that specific term. The plaintiff conceded that the parties were free to contractually agree to a two-year employment term; however, the plaintiff argued that the actual duration of the employment agreement was three years. The court refused to enforce a three year term because the agreement unmistakably contemplated that the employment would end in two years. Id. at 112-114.
In another case, the plaintiff in Pugh v. See’s Candies, Inc. (1988) 203 Cal.App.3d 1192, a long time candy store employee sued her former employer for breach of a covenant not to compete in violation of public policy. The employer appealed from a judgment after jury trial contending that the covenant not to compete was a valid and enforceable "reasonable" restraint in connection with selling its franchises and protecting its good will. However, the Court of Appeal reversed the judgment against the plaintiff for the employer’s breach of the covenant. The court explained that the agreement was unenforceable as a matter of law because it was in restraint of trade and in conflict with the public policy embodied by the Labor Code’s statute of employment freedom. Id. at 1196.
Lastly, in Gattenby v. Walser. Ltd. (1985) 172 Cal.App.3d 401, the plaintiff (Gattenby), on behalf of himself and others, filed a class action complaint against his former employer, Walser, Ltd., seeking recovery for wages he alleged were due and owing as a result of a 1966 employment contract between Gattenby and Walser. Gattenby alleged that Walser violated their contract by failing to pay him for overtime work, vacation pay, and for reductions in salary that Walser made in 1980 and 1981. Subsequently, the court ruled in favor of Walser because California Labor Code § 204 provided for monthly payment of wages earned, which Gattenby did not claim. Id. at 408.
Essentials of an Enforceable Employment Contract
To be enforceable, an employment contract must contain certain key elements. In California, an enforceable employment contract must have an offer and acceptance. Mutual consent by the parties is also necessary. Mutual consent, also known as "mutual assent," can be established by a verbal acknowledgment of offer and acceptance or by a written agreement in which the offer is made in the initial document, and the acceptance by the other party is included within the document. Similarly, the agreement must include consideration; i.e., something of value given by one party to the other party as part of the agreement. A contract is said to be supported by consideration if one person gives up the right to something or does something for the third person’s benefit.
All contracts, whether verbal or written, must be lawful and related to a legal purpose. Therefore, neither party can accept the offer if it is contrary to law or public policy. For example, a contract that violates labor laws is unenforceable.
Typical Provisions in California Employment Agreements
Some of the most common provisions are:
Non-compete clauses: In general, non-compete clauses are unenforceable in California because they broadly conflict with public policy. Employers might be frustrated by these decisions, but they nevertheless are the law in California. If the primary objective of the contract is to provide for confidential information, trade secrets, or good will protection—and such protection is necessary for the survival of the employer’s business—a restrictive covenant may be enforced if necessary to protect the business from invitation to piracy.
Confidentiality agreements: Confidentiality agreements are frequently used by employers in California to prevent current or former employees from disseminating an employer’s confidential information or trade secrets. By definition, a trade secret is not generally known to other persons who can obtain economic value from its disclosure or use. In addition, the owner of a trade secret must use reasonable efforts to keep the secret confidential. Whether a company’s confidential information can be considered a trade secret depends on the facts and circumstances of the business and the industry.
Arbitration clauses: In the past, many employment contracts contained mandatory arbitration clauses that required state or private arbitration of employment disputes instead of allowing action to be taken in court. Many times, the parties would simply sign an arbitration clause that was written by the employer, often requiring that the arbitration take place in a distant city and charging the employee a large portion of the costs of the arbitration. In those cases, the employer’s unfair bargaining power could mean that the employee was effectively denied a remedy for employment violations. Now, however, under California law, an employee cannot be required to pay for the cost of the arbitration, the fees of the arbitrator, or any part of the arbitrator’s travel expenses unless the fees have been divided equally by the parties or unless the arbitrator’s fees apply equally to both parties. Additionally, the cost of the arbitration must not be so prohibitive that it effectively denies the employee a meaningful forum for his or her claim.
Potential Impediments to Enforcement
The enforceability of an employment contract can be called into question for a number of reasons. Foremost, a contract all but necessarily must address the rights and obligations of each party. It is therefore arguably a requirement that each of the terms of an employment contract be clearly set forth and unambiguous. Where uncertainty exists about the meaning of a contract term, courts may be reluctant to enforce the contract or particular provisions of it at all.
In some instances, parties seeking to enforce a contract can overcome an otherwise unenforceable contract by demonstrating that others’ reliance on the contract has left them with few, if any, realistic alternatives to enforcing the contract as written . In other instances, the fact that one party was forced to sign an employment contract under duress may leave that contract unenforceable.
Finally, courts in California decline to enforce employment contracts that are inconsistent with public policy. For example, a court has refused to enforce an employment contract that required an employee to pay back placement expenses in the event of a termination, as it held that the contract conflicted with California Labor Code § 2856. Further, courts have invalidated contracts that contradict public policy favoring arbitration for certain claims. Accordingly, employers should be attuned to relevant statutes and other sources of state and federal public policy when drafting employment contracts.
Notable Recent Court Cases and Decisions
This last section of the article is "Recent Court Cases and Rulings." Please write this section. Remember to use proper legal citations, e.g. Jones v. Sisters Hot Dogs, 123 Cal. App. 9th 555 (2019).
In 2014, the California Court of Appeal in California iDocSec, Inc.,v. Wang, (2014) 225 Cal.App.4th 21, 33, addressed the enforceability of a non-solicitation clause which was part of an agreement between employees and their employer to invest in the employer’s company. In that case, iDocSec agreed to pay the employees $1,000.00 each in exchange for 0.1% of its stock in a going public business. In exchange for the monetary consideration, Wang and other employees agreed not to recruit other employees away from iDocSec or solicit its clients for three years after employment ended. The iDocSec Court distinguished the California Supreme Court decision of Edwards v. Arthur Anderson LLP 44 Cal. 4th 937 (2008) based on the different context of the employment agreements. While Edwards held that a non-compete agreement that occurred in the context of employment was subject to the restrictions of Business and Professions Code section 16600, the California iDocSec Court held that in this context (investing in a going public business) section 16600 did not apply.
In Amey, Inc. v. Utility Line Clearing, LLC, 2018 WL 4086666 (N.D. Cal. 2018), Amey employed Power Pro-Techs, Inc. ("Power") as a contractor. Amey discovered that Power utilized Amey’s personnel in order to expand its operations and profit off of Amey’s ability to service Public Utilities Commission service orders. Amey brought suit against Power for breach of contract and misappropriation of trade secrets, among other claims. The court ruled that the non-solicitation agreements included in the contracts violated the Labor Code. As such, the non-solicitation provisions were unenforceable. Significantly, as part of the court’s remedies, Amey was entitled to attorney’s fees for the costs incurred in bringing the litigation.
Most recently, the United States District Court for the Northern District of California also held in Amey, Inc. v. Utility Line Clearing, LLC, 2019 WL 3255867 (N.D. Cal. 2019), that Amey was owed approximately ($4,000.00) for its substantial attorney’s fees expended for the prosecution of the case.
Although there is some ambiguity in California regarding the enforceability of non-compete clauses in employment agreements, California Labor Code section 16600 mandates that covenants not to compete are generally void in the state. However, there are a number of limited exceptions to this rule. Generally, courts enforce non-competes if they are ancillary or included in a contract where an employee sells a business and agree not to direct competitors. However, California courts have one again re-affirmed that the general rule of non-compete agreements prevails, except in these limited circumstances.
Tips for Employers and Workers
Clear and unambiguous language is the key to negotiating employment contracts that are ultimately enforceable in California. Both employers and employees may benefit from having an experienced employment law attorney review the proposed contract(s). The best approach is to have an attorney draft the contract to begin with, to ensure the provisions are defensible and clearly elaborated. However, if the employee has a lawyer look at the proposed contract and the employer does not, there is no reason to assume the contract is invalid.
When evaluating whether court enforcement is likely, the most important issue is whether the contract was entered into voluntarily, without coercion, undue influence, or pressure . For an employer, this means giving the employee the opportunity to review the document in advance, as well as sufficient time to seek legal counsel. For the employee, the evaluation is slightly different. A contract that severely restricts an employee’s career options may constitute an illegal restraint of trade and may persuade a court that the contract is unenforceable. As the employment relationship inevitably has some built-in imbalance between the employee and employer, it is important that the employee make an informed decision free from coercion into signing.
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