Employment Rights in California's Tech Industry

Overview

California's technology industry operates under unique employment law rules that differ significantly from other states. California law favors employee mobility, limits employer control over IP, and imposes strict requirements on contractor classification. Understanding these rules is essential for tech workers.

Non-Compete Restrictions

Business and Professions Code Section 16600

California Business & Professions Code § 16600 provides that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." This statute effectively bans non-compete agreements in California.

Limited Exceptions

Non-competes are void even if the employee agrees to them. The only exceptions involve the sale of a business, a partnership dissolution, or similar situations where the restriction is ancillary to an actual business transaction.

Non-Solicitation Agreements

While non-competes are banned, non-solicitation agreements (preventing employees from soliciting clients or other employees) are now generally void in California. Following Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937 and AB 1076 and SB 699 (effective January 1, 2024), California courts have largely treated customer and employee non-solicitation covenants as unenforceable restraints under Business and Professions Code Section 16600.

Importance for Tech Workers

This rule is particularly important in the tech industry, where employee mobility is common. Tech workers can leave employers and join competitors without being restricted by non-compete agreements.

Intellectual Property Ownership

Labor Code Section 2870

California Labor Code § 2870 restricts employers' ability to claim ownership of employee inventions. The statute provides that an employer does not own an invention made by an employee if:

• The invention was developed entirely on the employee's own time without using the employer's equipment, materials, or facilities;
• The invention is not related to the employer's business or actual or demonstrably anticipated research; and
• The invention does not result from work performed for the employer.

The Notice Requirement Is Section 2872, and It Cuts Both Ways

The written-notice duty is in Labor Code Section 2872, not Section 2870. Where an employment agreement made after January 1, 1980 requires an employee to assign inventions, the employer must, at the time the agreement is made, provide written notification that the agreement does not apply to an invention which qualifies fully under Section 2870.

Two things follow that are easy to get wrong in the employee's favour, so treat them carefully. First, Section 2872 states no penalty for failing to give the notice. It does not void the assignment, and it does not forfeit the employer's claim to otherwise assignable work. Any argument built on the missing notice has to come from somewhere other than the text of this section.

Second, and more important if you are the inventor: Section 2872 places the burden of proof on the employee claiming the benefit of Section 2870. If you assert that an invention is yours because it was developed on your own time without company resources and falls outside the employer's business or your work for it, you are the one who has to establish that. Contemporaneous records of when and where you worked on it, and on what equipment, are what that burden looks like in practice.

What Section 2870 does give you is Section 2870(b): to the extent an employment agreement purports to require assignment of an invention that subdivision (a) excludes, the provision is against the public policy of this state and is unenforceable. So an over-broad assignment clause does not become enforceable merely because you signed it.

IP Assignment Agreements

Employees can voluntarily assign IP rights to their employer, but the assignment must be voluntary and cannot be enforced beyond what the law permits. IP created during personal time on personal equipment is typically owned by the employee.

At-Will Employment: Myths and Reality

What At-Will Employment Means

At-will employment means employment is not for a specified term and can be terminated by either party for any reason not prohibited by law. However, this does NOT mean employers can terminate employees for illegal reasons such as discrimination, retaliation for reporting violations, or other prohibited causes.

Common Misconceptions

Many tech workers believe they can be fired for any reason without consequence. In reality, California law provides numerous protections against wrongful termination, even in at-will employment relationships.

Implied Contracts

Courts have found that employer promises, handbooks, and conduct can create implied contracts limiting the at-will relationship. Statements about job security or termination procedures may be enforceable.

Stock Options and Equity Compensation

Vesting Requirements

While California law does not mandate particular vesting schedules, equity grants are typically subject to vesting. Federal law and company plans govern vesting schedules.

Rights Upon Termination

When employment is terminated, employees generally lose the right to unvested options. However, vested options typically remain the employee's property. Review your grant agreements and plan documents for specific details.

Tax Implications

Stock options and RSUs have significant tax consequences. Consult with a tax professional regarding the tax treatment of your equity compensation.

Fair Market Value Determination

Disputes sometimes arise regarding the fair market value of options or restricted stock units. These disputes often involve valuations set by 409A independent appraisals.

Contractor vs. Employee Classification (AB 5)

Assembly Bill 5 and the ABC Test

California Assembly Bill 5 codified a stricter test for contractor classification called the ABC test. Under this test, a worker is presumed to be an employee unless the hiring company can show:

• Control Test (A): The worker is not under the control or direction of the hiring company;
• Scope of Work Test (B): The worker performs work outside the usual course of the hiring company's business; and
• Independent Business Test (C): The worker is customarily engaged in an independently established trade or business.

Application to Tech Industry

The ABC test makes it very difficult for tech companies to classify workers as contractors if they perform core business functions. Many workers previously classified as contractors have successfully challenged their classification and recovered wages and benefits.

Penalties

Misclassification exposes employers to liability for unpaid wages, overtime, benefits, and penalties. Workers who believe they are misclassified should consult with an employment attorney.

Wage and Hour Protections for Tech Workers

Overtime Entitlements

Even in the tech industry, employees are generally entitled to overtime pay unless they fall within a valid exempt classification. The executive, administrative, and professional exemptions have strict requirements that many tech workers do not meet.

Regular Meal and Rest Breaks

California law requires employers to provide meal and rest breaks. Employees who are not relieved of duty and allowed to take breaks may be entitled to compensation.

Wage Statements and Final Paychecks

Employers must provide accurate wage statements and must pay all final wages immediately upon termination or within specified timeframes.

Conclusion

California's employment law has a significant impact on tech industry employment relationships. Understanding your rights regarding IP, non-competes, contractor classification, and equity compensation is essential. If you have questions about your employment relationship, consult with an employment attorney experienced in tech industry issues.