A California Chamber of Commerce-opposed bill that exposes businesses to high penalties and litigation by expanding the scope of prohibited non-compete agreements is expected to be heard soon by the California Assembly.
The bill, AB 747 (McCarty; D-Sacramento), augments an existing exemption to non-compete law and imposes a steep, $5,000 per employee penalty on businesses of any size if it is determined that their employment agreement includes an unenforceable non-compete.
AB 747 was introduced in the California Legislature last year and previously jeopardized benefits programs by prohibiting employers from offering certain bonuses or tuition payments. Those provisions were amended out of the bill yesterday, but the penalties and other problematic provisions remain. The bill is expected to be voted on soon.
The CalChamber opposes AB 747 because the bill expands the scope of prohibited non-compete agreements. New language in Section 3 of the bill appears to expand the term “contract in restraint of trade,” and the bill also prohibits any discussion of such terms with prospective employees or contractors because the language of the bill provides that even presenting someone with such language will result in the $5,000 penalty.
Additionally, the bill jeopardizes existing business models, implementing a 10% threshold for the sale of business exception. This threshold is problematic because one or more business owners under the 10% threshold could sell all of their interest in the entity to a third party, receive payment for that interest and immediately compete with the entity. It is arbitrary that most partners could compete while the one who owns an interest greater than 10% could not compete.
In a letter sent to legislators, the CalChamber pointed out that the Legislature addressed non-compete agreements just last year, so this bill is unnecessary. In 2023, two bills were enacted to bolster enforcement against non-compete agreements and require employers who use them to notify current and former workers: AB 1076 (Bauer-Kahan; D-Orinda) and SB 699 (Caballero; D-Merced). The business community did not oppose those bills. Just weeks after those bills taking effect, AB 747 now seeks to significantly increase civil penalties on all businesses and expand who may sue over non-compete agreements.