Reimbursement Agreements Between Employers And Employees Can Be Unlawful Non-Competition Agreements

Written by Galen T. Shimoda and Erika R. C. Sembrano

California forbids restraints on lawful employment. California Business and Professions Code section 16600 states 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 means that employers cannot restrict employees from obtaining lawful employment – even if it competes with the former employer. California courts have consistently declared that this provision is an expression of public policy to ensure that citizens retain the right to pursue any lawful employment and enterprise of their choice.

There have been situations where a California employer requires its employee to sign non-compete agreements. Yet, despite having agreed not to compete, a former employee still has the right to enter into competition with his or her former employer, even for the business of those who had formerly been customers of the former employer, and it makes no difference that the agreement not to compete is reasonably limited in time and geographic scope. Even "narrowly tailored restraints," such as length of time and geographic location, on an employee's right to pursue lawful employment is unenforceable.

Bottom line: employers cannot restrict employees from obtaining lawful employment.

Not all agreements are clearly non-compete agreements, however. One case involved a non-compete agreement that not only restricted the employee from performing certain duties for an eighteen (18) month period, but also prevented the employee from soliciting clients. The California Supreme Court determined that this agreement altogether restricted the employee's ability to practice his profession and therefore the agreement was invalid. This case demonstrated that preventing employees from reaching out to clients can be considered an invalid non-compete agreement.

A recent case, USS-POSCO Industries v. Case, evaluated California's policy against non-compete agreements in relation to a reimbursement agreement between the employer and the employee. In Case, the employee enrolled in a three-year educational program paid for by the employer. In the agreement, he agreed that if he quit his job within thirty (30) months of completing the educational program, he would reimburse the employer a certain amount (depending on when he quit) of the program costs. Two (2) months after completing the program, the employee quit and went to work for another employer. After the employee refused to pay for the costs, the employer brought a lawsuit against the employee and asked for approximately $28,000, which was calculated at $1,000 per month that remained under the thirty (30) month period. The employee argued, among other things, that this reimbursement agreement was an invalid restraint on his employment, or, in other words, was an invalid non-compete agreement. The court disagreed, highlighting not only that the employee voluntarily entered into this program and the agreement, but also that nothing prevented the employee from obtaining another job. Indeed, he already had another employer after quitting!

The court also emphasized that the employer, not the employee, paid the costs of the educational program. Thus, pursuant to the agreement, the employee was to reimburse the employer for these costs. The employer was not deducting from the employee's pay for such costs, nor was the employer trying to take back the employee's earnings from the employment. Ultimately, repayment of costs that the employer provided to fund the educational program was not a restraint on his employment. Further, the court noted that the employee retained benefits of the program, benefits that he could take with him to any future employment.

The Case case demonstrates that there can be restraints on employment that are unlawful, even though an agreement with these restraints is not clearly a "non-compete agreement." Employers must be careful when drafting similar reimbursement agreements – may it be for training programs, educational programs, etc. – to ensure that they do not restrict an employee from pursuing lawful employment.

For example, take an employer who has an agreement that allows the employer to take a certain percentage of an employee's earnings each pay period, put it in a fund that the employer controls, and use this fund to pay for training costs that the employer requires the employee to incur, such as mandatory training classes. This agreement also provides that if the employee leaves before a certain date, then the employee must pay the employer a certain amount of money for these training costs. In this example, the employment relationship ends prematurely and the employee must reimburse the employer approximately $100,000 in costs for these classes based on the agreement. Arguably, this agreement would discourage the employee from leaving employment by the time designated in the contract because of the possibility of paying the $100,000 or some portion thereof. Thus, the employee is seemingly restricted from pursuing otherwise lawful employment.

Case and this hypothetical seemingly reach different results but are based on a similar type of repayment agreement. Employers can and have implemented training programs or educational programs in order to benefit the workforce, and courts have recognized the public advantage to promoting such actions. However, if an employer pays for these programs and wants the employee to reimburse it if the employee leaves employment within a certain amount of time, the employer should be sure that it is not indirectly (or directly) having the employee sign an invalid non-compete agreement. What Case shows us is that the employee voluntarily entered into the agreement, that the employee understood the terms of the agreement, and that the employer paid for the costs of the agreement. Employers looking to implement a similar agreement like that in Case should take those facts into consideration when drafting their own reimbursement agreement.

Each situation, however, must be evaluated on its own facts. If you are an employee who signed a reimbursement agreement like the ones stated above, or if you are an employer who contemplates implementing a reimbursement agreement like the ones stated above, contact our office to have your potential situation evaluated.


The Shimoda Law Corp. legal articles should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents of these articles are intended for general information purposes only, and you are urged to consult a lawyer concerning your own situation and any specific legal questions you may have.

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