Cal-Peculiarities: How California Employment Law is Different 2022 Edition

332 | 2022 Cal-Peculiarities ©2022 Seyfarth Shaw LLP  www.seyfarth.com settlement agreements must be drafted carefully to avoid imposing any substantial restraint on the former employee’s profession, trade, or business. Moreover, as of 2020, the California Legislature has banned virtually all “no rehire” clauses in settlement agreements. Subject to certain specified exceptions, no settlement agreement may restrict a settling “aggrieved person” from obtaining employment with the employer against which that person has filed a claim, or with the employer’s parent company, subsidiary, division, affiliate, or contractor. The exceptions are these: (1) The parties may agree to end a current employment relationship. (2) A “no rehire” clause is permissible if the employer has determined, in good faith, that the settling party engaged in sexual harassment or sexual assault. Further, of course, an employer retains its right to deny employment to current employees and job applicants whenever “there is a legitimate non-discriminatory or non-retaliatory reason for terminating the employment relationship or refusing to rehire the person. ” 31 Legislation in 2020 modified the second exception (where the settling party engaged in certain misconduct). Under this new law, the employer invoking this exception must have documented its determination of sexual assault or sexual harassment before the settling party filed a claim against the employer. While this new provision narrowed the second exception, another new provision expanded the exception to include “any criminal conduct”—not just sexual harassment or sexual assault . 32 12.4 Permissible Contractual Restrictions Section 16600, while broad, is not unlimited. Certain contractual restrictions, while arguably within some unthoughtful notion of a “restraint of trade,” are nonetheless enforceable. 12.4.1 Duty of loyalty existing during employment During employment, employers, even in California, are entitled to their employees’ undivided loyalty. This principle was put to the test in a 2020 Court of Appeal decision, which rejected the argument that an employee’s promise to his employer not to form a separate, competing company was somehow unenforceable as against California public policy. The Court of Appeal thus affirmed a ruling in favor of Techno Lite, Inc., against former employees found liable for intentional interference with contractual relations, intentional interference with prospective economic advantage, fraud, and unfair competition. In the underlying case, Techno Lite, a seller of lighting transformers, employed Scott Drucker, who formed Emcod, LLC to operate as a “backup” for Techno Lite customers. Techno Lite allowed Drucker to operate Emcod because he promised that he would run Emcod on his own time, and that Emcod would not compete with Techno Lite in the lighting industry. When Drucker resigned, Techno Lite sued him, alleging that he used Emcod to siphon off Techno Lite’s accounts and divert its business to Emcod. Discovery revealed that while Drucker was an employee, emails had gone to Techno Lite customers to switch them over to Emcod, representing that Emcod’s owners were in the process of buying out Techno Lite. In affirming judgment for Techno Lite, the Court of Appeal made these observations : 33  Business & Professions Code section 16600 does not prevent an employer from limiting employee during employment. California law does not authorize an employee to transfer his loyalty to a competitor. During employment, employers are entitled to their employees’ undivided loyalty.  An employee’s promise not to compete with the employer while the employee remains employed is not void.