Can I Sue an Employee Who Started a Competing Business While Still Working for Me in California?

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

Yes. A California employee owes the employer undivided loyalty for as long as the employment lasts, and Labor Code section 2863 requires an employee with a similar business of their own to give preference to the employer's business. A sales manager who diverts your customers to his own company while on your payroll has breached that duty. You can sue him, and often the new company, for what you lost and what they gained. Kolmogorov Law, P.C. represents employers in these disputes in Orange County, Los Angeles, and across California.

Call (909) 235-6116 or contact us online to discuss an employee who has been competing with your company from the inside.

What the duty of loyalty requires during employment

The duty comes from the relationship, not from a signed agreement. An employee is the employer's agent, and the law attaches a duty of loyalty to that role whether or not the offer letter mentions it.

Two Labor Code sections give the duty a statutory footing. An employee who has business to transact on their own account, similar to the business entrusted to them by the employer, must give preference to the employer's business. (Lab. Code, § 2863.) And everything an employee acquires by virtue of the employment, other than compensation, belongs to the employer. (Lab. Code, § 2860.)

The Court of Appeal has put the rule in one sentence: an employee, while employed, owes undivided loyalty to the employer. It applied that rule to uphold an injunction against managers who steered customers to a rival. (Huong Que, Inc. v. Luu (2007) 150 Cal.App.4th 400.) The opinion treats employees as agents for this purpose even in jobs with no outside dealings. Officers carry heavier fiduciary duties, but a rank-and-file salesperson is covered too.

Preparing to compete versus competing

This is the line every one of these cases turns on.

An employee may look for another job. An employee may also make some preparations to compete before resigning. The California Supreme Court put it this way for a corporate officer: the mere fact that the officer makes preparations to compete before resigning is not a breach, and it is the nature of the preparations that matters. (Bancroft-Whitney Co. v. Glen (1966) 64 Cal.2d 327, 346.) No fixed list exists.

In practice, courts tend to sort the conduct like this. Forming an entity, leasing space, and lining up financing on personal time usually fall on the lawful side. Diverting a customer, steering an order, recruiting coworkers for the new venture, or using company time and data to build it usually do not. In Huong Que, the court assumed the employees could help form a competitor and still found a likely breach in the diverted customers.

What a breach looks like in practice

A regional sales manager forms an LLC in his spouse's name. For four months he quotes high on the company's bids and has his own entity submit lower ones to the same buyers.

An estimator at a service company tells callers the schedule is full and offers to "do it on the side." The jobs never enter the company's system.

An account executive, a month before resigning, exports the customer list and asks three key accounts to hold their renewals until she is "settled somewhere new."

None of these employees signed a non-compete. None needed to.

What an employer can recover

The basic claim has three elements: a relationship giving rise to the duty, a breach, and damage caused by the breach. The remedies are broader than the elements suggest.

Lost profits on diverted business come first. Where the employee profited, the employer can also ask the court to treat those gains as held in trust. A person who gains a thing by a wrongful act is an involuntary trustee of it for the person who would otherwise have had it. (Civ. Code, § 2224.) In some cases courts have also let employers recover bonuses paid while the disloyalty was hidden, though ordinary wages already paid are treated differently.

The new company is frequently a proper defendant. So is a competitor that knowingly took part. And if company files or customer data left with the employee, trade secret and computer access claims may be added; our departing employee checklist covers how to preserve that evidence.

Speed matters when customers are still being diverted. A temporary restraining order or preliminary injunction can stop ongoing misuse of company information while the case proceeds.

What the duty does not do after the employee leaves

The duty of loyalty ends with the employment. After that, California's rule against restraints on trade takes over.

Every contract that restrains anyone from engaging in a lawful profession, trade, or business is void to that extent, and the Legislature has directed courts to read that rule broadly in the employment context. (Bus. & Prof. Code, § 16600, subds. (a), (b)(1).) A former employee is generally free to open a competing shop the day after resigning. Our non-compete guide explains what little remains enforceable.

So the case has to be built on conduct during employment, on misuse of trade secrets, or on taking property. A complaint that reads like an attempt to enforce a non-compete invites a quick defense motion. For coworker recruiting specifically, see our page on employee poaching and raiding.

First steps when you discover it

Preserve before you confront. Image the employee's company laptop and phone, suspend automatic deletion on the email account, and pull CRM export logs and badge records.

Then decide about termination with counsel. Courts have treated a breach of loyalty as good cause for discharge, but the timing affects what evidence you can still collect.

Pay final wages on time. Wages earned and unpaid at discharge are due immediately. (Lab. Code, § 201, subd. (a).) Withholding a paycheck to offset your losses creates a second dispute you do not need. If money or property was taken outright, our page on employee theft and embezzlement covers those remedies.

I usually recommend against calling the diverted customers to accuse the employee. A short, factual note that the person no longer represents the company does the job. For our clients, these cases are usually filed in the Orange County or Los Angeles Superior Court.

What to bring to the first meeting

The employee's offer letter, handbook acknowledgment, and any confidentiality agreement.
Secretary of State filings, websites, or invoices for the competing entity.
Emails, texts, or CRM records showing diverted quotes, orders, or customers.
A list of affected customers with revenue before and after.
Payroll and bonus records for the period in question.

Frequently asked questions

My sales manager set up a competing company and diverted customers to it while still on my payroll. What can I do under California law?

You can sue for breach of the duty of loyalty. California employees owe undivided loyalty while employed, and Labor Code section 2863 requires them to prefer the employer's business over a similar business of their own. Remedies can include your lost profits, the gains the manager and his company made from diverted accounts, and an injunction against continued misuse of company information.

Is it illegal for an employee to start a competing business in California?

Not by itself. California lets an employee plan a new venture and make some preparations before resigning. The breach occurs when the employee actually competes while still employed: taking customers, steering orders, or using the employer's time, data, or resources for the new business. Recruiting coworkers for it can also be a breach, depending on how it was done. After resignation, the former employee is generally free to compete.

What is Labor Code section 2863?

It is the California statute that states the employee's duty of preference. An employee who has business to transact on their own account, similar to the business the employer has entrusted to them, must give preference to the employer's business. Courts cite it alongside the common law duty of loyalty when an employee runs a competing side business.

Can I get back the salary I paid an employee who was secretly working against my company?

Possibly some of it, but do not count on all of it. California courts have allowed employers to recover bonuses paid in ignorance of an employee's disloyalty, and they treat voluntary wage payments more cautiously. The stronger measures are usually the profits you lost and the profits the employee made, which is why transaction records matter more than payroll records.

Does the duty of loyalty apply to employees who are not officers or managers?

Yes. California treats every employee as the employer's agent for this purpose, including employees with no authority to sign contracts or deal with outsiders. Officers and managing agents owe broader fiduciary duties, so the claim against a president looks different from the claim against a salesperson, but each owes loyalty while on the payroll.

Talk to a California business litigation attorney

If an employee has been building a competitor on your time, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located at 327 Magnet, Irvine, CA 92618, and represents employers and business owners in Orange County, Los Angeles, and throughout California.

This page provides general information about California law and is not legal advice. Outcomes depend on the employee's conduct, the evidence, and the court.