When a Non-Solicitation Agreement is Better than a Non-Compete Agreement
Nothing is more frustrating than watching workers you’ve trained and fostered walk away from your company to join the competition, taking customers and expertise with them. More and more businesses are looking to non-compete and non-solicitation agreements to prevent this problem. So what kind of agreement is right for your company? It depends on what you’re looking to protect.
Non-compete agreements are designed to prevent workers who leave your company from going into direct competition, by restricting the jobs that workers can take after they leave. Non-solicitation agreements generally prevent employees who have left your company from soliciting your customers or recruiting co-workers to join them at their new job.
Often times, companies include non-solicitation clauses in their non-compete agreements, particularly if their main concern is preventing other companies from poaching their clients or workers. But non-solicitation agreements can also be stand-alone contracts. In fact, after careful consideration of your business interests, you may decide that your company doesn’t need non-compete agreements at all, and instead focus on drafting a strong non-solicitation agreement.
When you’re deciding what to put in an agreement, the first thing to recognize is that putting something in a contract isn’t enough to guarantee that it will be enforceable. Non-compete agreements are particularly vulnerable, and courts routinely refuse to enforce them. This is because courts are hesitant to uphold contracts that prevent workers from being able to make a living.
In contrast, courts tend to be less suspicious of non-solicitation agreements than they are of non-compete agreements, because they do not typically prevent employees from making a living. However, if a non-solicitation agreement is so broad that it prevents employees from engaging in their trade after leaving your business, courts may consider it equivalent to a non-compete agreement.
The Pitfalls of Non-Compete and Non-Solicitation Agreements
Both non-compete and on-solicitation agreements must have a business purpose—they can’t just be designed to impose hardship on workers who leave the company. The most common business reasons companies have for asking workers to sign non-compete agreements are to protect trade secrets or to protect the goodwill the company has with its customers. If your primary reason for having a non-compete agreement is to prevent employees from leaving with your rolodex of clients, you may want to consider a non-solicitation agreement instead.
Be selective about which workers you ask to sign non-compete agreements. If you have non-compete agreement to protect your company’s relationships with clients, then workers who don’t deal with clients (like the company bookkeeper) probably shouldn’t be asked to sign it.
Benefit to the Employee
Non-compete agreements must be made in exchange for some benefit to the employee. If you require a new hire to sign a non-compete agreement, than the job itself it usually sufficient benefit. If you want a worker who’s already with your company to sign one, however, you should couple it with some other offer, like a promotion or raise.
As a general rule, the narrower the restrictions you place on workers, the more likely your agreement is to be upheld. Any restrictions you do impose in the contract must be “reasonable.”
Having reasonable restrictions is particularly important for non-compete agreements or client non-solicitation agreements that place heavy restrictions on workers. What is reasonable varies a great deal from state to state, and there is no national standard.
Courts are suspicious of long non-compete contracts, so you should consider the duration of each person’s agreement carefully. For example, if you’re trying to protect client relationships, you could have longer non-compete agreements with higher level managers, who have relationships with your whole client base, while opting for shorter agreements with low-level salespeople, who have more limited contacts.
Another important factor in determining whether a contract is reasonable is the geographic scope and the scope of limitation. The geographic scope of the agreement should be as limited as is appropriate for your business. On a basic level, a non-compete agreement should not prevent a worker from taking a job or starting a business in an area where your company does not operate. If your company only does business in New York, you should not have a non-compete agreement that applies to the entire country.
Scope of limitation focuses on the types of jobs that are restricted by the non-compete agreement. The agreement should narrowly focus on the industry that the company works in rather than preventing the employees from working in a broad range of fields. For example, if your company does landscape installation and snow services, your non-compete agreement should specifically bar competition in the landscaping and snow industries, rather than preventing an employee from working in any construction jobs.
When to Use a Non-Solicitation Agreement
Businesses generally opt for non-solicitation agreements when the purpose of the contract is to protect customer lists or ensure that a group of workers with specialized skills don’t leave the company all at once.
Another common use of non-solicitation agreements is intended to prevent workers from soliciting clients of the business. While some of this can be accomplished via non-competition agreements, sometimes a business may want to limit a workers ability to solicit clients for other things that may not fall under the non-competition agreement.
Whatever you are looking to protect must be valuable. For example, if your non-solicitation agreement is designed to prevent workers from using your list, the list needs to contain valuable contacts that your company worked to find or develop. It cannot simply be a list of names culled from the internet or phone book.
What a Non-Solicitation Agreement Can’t Do
No matter how strong your non-solicitation agreement is, it cannot prevent workers and clients from leaving of their own freewill. If an employee leaves the company and other workers are tempted to follow of their own volition, a non-solicitation agreement does not offer you any recourse. All it does is prevent workers who leave from recruiting others to go with them.
The same goes for clients. If one of your clients has a strong relationship with the employee who left your company, hears about the move and decides to follow them, there’s not much you can do. As long as your former worker didn’t explicitly or implicitly solicit the client, it likely will not violate the agreement.
A Word of Warning
The laws surrounding non-compete and non-solicitation agreements vary widely by state. While this overview is applicable in most states, some courts are far more likely to invalidate non-compete and non-solicitation agreements than others, and your home state may have slightly different standards for evaluating them. Most notably, non-compete and non-solicitation agreements are virtually unenforceable in California. It is absolutely necessary to speak to a qualified attorney in your state if you are considering implementing non-compete and non-solicitation agreements at your company.