You have invested a lot of time and money in developing your employee, customer, and vendor relationships. You cannot stop your employees from walking out the door, but you may be able to limit their ability to take other employees and business relationships with them. Nonsolicitation agreements are contractual provisions that restrict an employee’s ability to poach your customers or other employees for a specified period of time after they leave their job.
Although nonsolicitation agreements are generally enforceable when properly drafted, a current employee could view the agreement as a sign of bad faith. Nonsolicitation agreements are commonly used with key employees, so it is important to avoid sending the wrong message. At the same time, failing to limit an employee’s ability to undercut your business also presents a risk.
So how should a business owner navigate this dilemma? We can explain your options and advise you on the best course of action.
What is a nonsolicitation agreement?
Nonsolicitation agreements prohibit an employee from soliciting business contacts gained at their former company after they begin working for a new company. The restrictions in a nonsolicitation agreement are used to protect important business information that the employee gained during their employment.
A nonsolicitation agreement can be part of a larger employment agreement or a stand-alone contract. An employer can present the agreement to an employee at any time during the employment relationship. The agreement lasts for a specific period of time after an individual’s employment ends.
How does a nonsolicitation agreement differ from a noncompete agreement?
Nonsolicitation agreements and noncompete agreements are types of restrictive covenants. Nonsolicitation agreements prohibit a former employee from tapping into its former employer’s current, prior, or prospective customers—or employees—for a specified time period. Noncompete agreements prohibit a former employee from competing against their former employer (i.e., working for a competitor or setting up a competing business) for a specified time period and within a specific geographic area.
In general, nonsolicitation agreements are less restrictive than noncompetes and are viewed more favorably by courts because the employee who signs a nonsolicitation agreement faces no limits on their right to work. Notably, agreements to not solicit are also more likely than noncompetes to be enforceable against independent contractors.
Why would I ask an employee to sign a nonsolicitation agreement?
Any employee can be asked to sign a nonsolicitation agreement, but most of the time, they are used for key workers—such as top-level executives and managers—who possess important company knowledge or have close relationships with other employees, customers, and vendors. A nonsolicitation agreement may be a required term of employment, or part of an independent contractor agreement, severance package, or merger, acquisition, or sale.
A nonsolicitation agreement can help you protect your business interests. For example, if an employee who had access to your customer list left your company, they could start a competing business and use the list to try to lure away the clientele you have spent years building. They could also recruit valuable employees to leave your company and join them. In the case of a sale or restructuring, a nonsolicitation agreement can keep customer and employee information from being used as leverage against you.
What are the risks of using nonsolicitation agreements?
Trust between an employer and their employees is invaluable. Asking an employee to sign an agreement not to solicit customers or clients could damage this trust. They may view it as an insult and possibly even leave the company. At a minimum, it will have some negative affect on esprit de corps.
To avoid causing undue offense, a nonsolicitation agreement should be balanced with incentives that reward a worker for staying with the company and achieving certain performance benchmarks. Think of the incentives as a spoonful of sugar to wash down otherwise bitter medicine. Further, under contract law, you may be required to offer some form of consideration for the agreement to be enforceable.
Are nonsolicitation agreements enforceable?
Typically, a nonsolicitation agreement is enforceable as long as it is reasonable (i.e., not overly restrictive). If an employee raises a legal challenge to the agreement, a court would ultimately make this determination. The following are a few basic points to guide employers in crafting enforceable nonsolicitation agreements:
- Ensure that the agreement targets only the company’s legitimate business interests and is not overly broad. You must have an asset that is worth protecting.
- Place reasonable time restrictions on the agreement. Most information is time-sensitive, and courts are likely to strike down an agreement that extends for too long after an employment relationship ends.
- Balance is key. You have interests to protect, but so does the employee. The agreement may be unenforceable if it imposes an undue burden on a former employee. Contracts require parties to give something up to gain something in return.
- Comply with state law. In California, nonsolicitation agreements are almost always unenforceable. In other states, there may be specific restrictions on when and how they can be used. Our California clients may consider them for operations in other states, for example where a key employee is setting up a branch office.
Carefully constructed nonsolicitation agreements can protect your business interests without unduly burdening a former employee. However, a one-size-fits-all agreement is unlikely to work in every circumstance and could leave you open to risk. Each agreement should be tailored to your business, state law, and the specific employee you wish to stop from soliciting.
We can help you create a nonsolicitation agreement that prohibits a former employee from soliciting your most important clients and customers. Contact our office to set up an appointment.
