What Are Non Solicitation Agreements and Covenants Not To Compete? (With Templates)

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Date Created: 7 Nov 2020
Last Update: 23 Nov 2020

Every employer has relationships, with customers/clients/suppliers, and proprietary information that are pivotal to their success. It is in every employer's best interests that these relationships and information are retained.

 

Employees, over the course of their employment, are often heavily exposed to these customers/clients/suppliers and proprietary information and can potentially steal these relationships/information when they leave an employer.

 

As such, it is imperative that employers protect themselves. They can do this through non-solicitation agreements and covenants not to compete.

 

 

Non Solicitation Agreements

 

1. What is a non solicitation agreement?

 

A non-solicitation agreement is an agreement, between employer and employee, whereby an employee agrees not to contact or approach the customers, suppliers and employees of the employer, with the intention of establishing business relations. Despite being called non-solicitation agreements, they are often found, as a clause, most commonly in employment contracts.

 

Employers include such clauses in employment contracts because of their utility in maintaining value in a business. Employers spend considerable time, money and effort to develop strong relationships with suppliers, customers, consultants and others. These strong relationships are often pivotal to the success of the employer’s business. Employees often over the course of their employment, are introduced to and exposed to these suppliers, customers and consultants and also form close relationships with them, sometimes ones which are closer than the employer’s ones. This poses a risk for employers when employees leave the business – employees may try to leverage these relationships to obtain their business for the benefit of their new employer or new company.

 

Employers can mitigate this risk by including a non-solicitation agreement in employment contracts. Non-solicitation agreements restrict the ability of an employee from contacting the employer’s suppliers, customers and employees for the purposes of obtaining their business or services. Non-solicitation agreements are normally effective both during the course of employment and after the end of an employment relationship.

 

If the employee does nonetheless contact these parties, he/she breaches the non-solicitation agreement. In such a case, the employer is entitled to go to court and seek remedies including damages (money to compensate the employer for any loss caused by the employee) or even an injunction (a court order requiring the employee to abstain from contacting these parties).

 

2. What does it mean to ‘solicit’?

 

Generally, an ex-employee ‘solicits’ if he/she contacts or approaches an employer’s customers, suppliers or employees with the intention of acquiring their business or services for their own benefit. 

 

An employee’s efforts to solicit an employer’s customers/clients can be very obvious. For example, an employee who is leaving an employer’s company might send a letter to one of the company’s customers, explicitly stating “Hi, would you like to work with me instead of the company?”. Such obvious examples of solicitation are often coined as ‘direct solicitation’.

 

An employee’s efforts to solicit an employer’s contacts can also be very subtle ('indirect solicitation'). For example, an employee might procure a third party to contact his ex-employers customers/suppliers. An employee merely advertising his new business in a local newspaper that the employee's ex-clients are bound to see, or an employee updating his Linkedin profile stating his new job, might depending on the situation, count as a solicitation. 

 

Whether the acts of an employee are considered to be ‘solicitation’ and thereby in breach of a non-solicitation agreement, or acceptable correspondence, is heavily fact-dependent and varies from situation to situation. 

 

3. Is there anything I should include in my non solicitation agreement?

 

As stated above, non-solicitation agreements are normally effective both during the course of employment and after the end of an employment relationship.

 

Even though non-solicitation agreements are effective after the end of an employment relationship, they should not be effective indefinitely. They should clearly be stated to be effective for a limited period of time.

 

In deciding how long non solicitation agreements should be effective, employers should primarily consider how long it will take an employer, after the employee leaves, to re-secure relations with customers and suppliers to retain their business in the long run.

 

Every employer should consider the following when deciding how long a non-solicitation agreement should last for:

  • State of the employment market – the longer it may take to replace an employee the longer your solicitation agreement should last for.

  • How long it will take for the employer or his employees/contractors/consultants to re-secure relations with customers/suppliers to retain their business

  • How customer/supplier facing the employee’s role is – the more exposure an employee has to customers/suppliers, the stronger relations they are likely to build with them. The stronger the relations, the longer the time an employer may want to re-secure business relations with customers/suppliers to retain their business.

  • Industry-standard

4. When should I use a non solicitation agreement?

 

Generally, employers should ensure they have non-solicitation agreements with employees in client-facing roles or industries. Examples of client-facing industries include the services and sales industries. 

 

Employers who operate in industries where businesses rely heavily on customer loyalty – such as hair salons and beauty parlours – should also ask employees to sign non-solicitation agreements. Customers in such industries may develop loyalty to particular employees as opposed to particular businesses. In such industries, without proper protection, employees can easily leave and poach clients and customers for their own benefit. 

 

5. Is a non-solicitation agreement the same as a clause not to compete?

 

Non-solicitation and covenants not to compete are similar in that they both fall under the family of terms called ‘restrictive covenants. ‘Restrictive Covenants’ is a label for terms that restrict a person from taking some specified action. Non solicitation agreements and covenants not to compete are restrictive covenants: they both restrict the employee from contacting specified persons and entering in competition with the employer respectively.

 

Non-solicitation agreements and covenants not to compete differ, however: they differ in how they restrict the employee. A non-solicitation agreement restricts an employee from seeking to engage in commercial relations with the employer’s important business contacts. Covenants not to compete, on the other hand, restrict an employee from establishing a business or working for an employer in competition with the employer.

 

 

6. Are non-solicitation agreements enforceable? (UK, USA (California, New York), other major common law jurisdictions) 

 

Jurisdiction

Are non-solicitation agreements enforceable?

Remarks:

India

Partly Enforceable

Non solicitation agreements are only enforceable during employment but not post-employment

United Kingdom

Enforceable

Enforceable both during and post-employment

Hong Kong

Enforceable

Enforceable both during and post-employment

Australia

Enforceable

Enforceable both during and post-employment

New Zealand

Enforceable

Enforceable both during and post-employment

USA (California)

Partly enforceable

Client and customer non-solicitation agreements are not enforceable during or post-employment. Employee non-solicitation agreements are enforceable during and post-employment.

USA (New York)

Enforceable

Enforceable both during and post-employment

Singapore

Enforceable

Enforceable both during and post-employment

Malaysia

Partly Enforceable

Non solicitation agreements are only enforceable during employment but not post-employment

Canada (Ontario)

Enforceable

Enforceable both during and post-employment

 

 

Covenants Not To Compete: 

 

1. What are covenants not to compete?

 

A covenant not to compete, also called a ‘non-compete’, is a clause included in an agreement, between an employer and employee, whereby the employee agrees not to work in competition with the employer. It restricts an employee from working in a competition with an employer both by opening his/her own business and working for an employer in direct competition with the employer.

 

Covenants not to compete are normally effective both during the course of employment and after the end of an employment relationship.

 

2. When should I use a covenant not to compete?

 

To understand when to use a covenant not to compete, it is important to firstly understand its purpose. Covenants not to compete serve a much broader purpose as compared with non-solicitation agreements. Like non-solicitation agreements, they aim to protect an employer’s customers, suppliers and employees from being poached by an ex-employee. Covenants not to compete also, however, protect confidential, proprietary information and trade secrets of an employer from being used by an ex-employee for the employee’s benefit.

 

Considering this broader purpose, any employer in client-facing industries, in small markets, in industries where businesses depend on loyalty should all consider subjecting employees to clauses not to compete. Additionally, however, employees who are exposed to confidential information and trade secrets during the course of their employment should also be subject to clauses not to compete.

 

3. Is there anything I should include in a covenant not to compete?

 

As aforementioned, covenants not to compete are normally effective both during the course of employment and after the end of an employment relationship. They should not, however, be effective indefinitely after the end of employment.  

 

Covenants not to compete, like non-solicitation agreements, should be for a limited period of time. In deciding how long a clause not to compete should be effective, an employer should have regard to the following factors:

  • State of the employment market – the longer it may take to replace an employee the longer your solicitation agreement should last for.

  • How long it will take for the employer or his employees/contractors/consultants to re-secure relations with customers/suppliers to retain their business

  • How long an employer’s confidential information will remain ‘confidential’.

Employers should consider how long it might take before their confidential information becomes outdated or becomes public information. In fast-moving industries – such as technology – such confidential information and know-how may quickly become out-dated or publicly available. Covenants not to compete in these fast-moving industries may be shorter, than those in slower-moving industries, where confidentiality must persist for much longer periods of time.

  • Industry-standard

 

4. Are covenants not to compete enforceable? (UK/USA (California, New York etc),

other major common law jurisdictions) 

 

Jurisdiction

Are covenants not to compete enforceable?

Remarks:

India

Partly Enforceable

Clauses not to compete are only enforceable during employment but not post-employment

United Kingdom

Enforceable

Enforceable both during and post-employment

Hong Kong

Enforceable

Enforceable both during and post-employment

Australia

Enforceable

Enforceable both during and post-employment

New Zealand

Enforceable

Enforceable both during and post-employment

USA (California)

Not enforceable

Not enforceable during or post-employment

USA (New York)

Enforceable

Enforceable both during and post-employment

Singapore

Enforceable

Enforceable both during and post-employment

Malaysia

Partly Enforceable

Clauses not to compete are only enforceable during employment but not post-employment

Canada (Ontario)

Enforceable

In theory enforceable both during and post-employment, but in practice difficult to enforce.

 

Common Rules For Non Solicitation Agreements and Covenants Not To Compete: 

 

1. How can I agree to a non-solicitation agreement and clause not to compete with my employee?

 

We recommend employers to use two different methods to agree to non-solicitation and covenants not to compete with an employee.

 

The methods we recommend vary depending on whether the employee has already signed an employment contract with the employer or not.

 

If dealing with a to-be hired employee, yet to sign an employment contract with the employer, we recommend that the employer insert a non-solicitation agreement and clause not to compete into the employee’s employment contract. By inserting these clauses into the employment agreement, employers will be able to make non-solicitation and non-competition both conditions of employment. This is because, if the employee contests the inclusion of these provisions, the employer can simply refuse to hire the employee. 

 

If the employee has already signed an employment contract with the employer, we recommend the employer get the employee to sign a separate non-solicitation/non-compete agreement.

 

It is important to note that this 'separate non-solicitation/non-compete agreement' is just like any other ordinary contract and so must fulfil the requirements for any contract to be enforceable. Generally, there must be (i) Offer, (ii) Acceptance, and (iii) Consideration.

 

The requirements for (i) offer can be fulfilled by giving the employee a written copy of the contract with the non solicitation and covenant not to compete. (ii) Acceptance can be fulfilled by receiving a signed copy of the contract from the employee.

 

The requirement for consideration demands that something of value is given by each party in exchange for the other party undertaking the obligations as stated in a contract.

 

In this context, an employee is clearly providing something of value to the employer: an employee is undertaking the obligation not to solicit clients/customers of an employee in a non-solicitation agreement. An employee undertakes the obligation not to compete with an employer through a covenant not to compete.

 

In exchange, an employer needs to give something of value to the employee. This might be in the form of a bonus, or promotion from the employer.

 

 

2. What makes non-solicitation agreements and covenants not to compete enforceable?

 

As earlier mentioned, non-solicitation agreements and covenants not to compete are both examples of restrictive covenants. As such, the same rules apply for both to determine whether they are enforceable.

 

At the offset, it is worth mentioning that whether a particular non-solicitation agreement or covenant not to compete is enforceable is very fact-specific: it depends on the wording of the clause and the broader employment relationship.

 

The starting point, in most common law jurisdictions, is that any form of restriction, imposed by an employer on an employee, on the employee’s economic activities post-employment are restraints on trade. Such restraints on trade are unlawful as they go against public policy. Non-solicitation agreements and covenants not to compete are restraints on trade as they preclude an employee from freely engaging in commerce with whomsoever they please.

 

Nonetheless, restraints on trade, such as non-solicitation agreement and covenants not to compete, may be enforceable if an employer can fulfil two conditions:

(A) The agreement/covenant protects a legitimate interest of the employer

(B) The protection provided by the agreement/covenant is reasonable

 

(A) The agreement/covenant protects a legitimate interest of the employer

 

Firstly, the employer must show that the non-solicitation agreement/covenant protects a legitimate interest.

 

The law does not exhaustively define what counts as a ‘legitimate interest’. There are, however, some generally accepted examples of legitimate interests. These include the employer’s interest in protecting:

 

(i) Business connections with customers/suppliers/manufacturers

(ii) Trade secrets/Confidential Information

(iii) Workforce stability

 

It is also clear that preventing or reducing competition is not a legitimate interest. Thereby, an employer will not be able to enforce a non-solicitation or agreement/covenant not to compete if its inclusion is solely for the purpose of preventing/reducing competition.

 

To avoid ambiguity in what an employer’s legitimate interest is in a particular restriction, we recommend that employers explicitly convey the legitimate interest being protected in their non-solicitation agreement/covenant not to compete.

 

Employers should pay close attention whilst drafting these clauses – otherwise, employers risk the clause being deemed unenforceable.

 

(B) The protection provided by the agreement/covenant is reasonable

Secondly, the employer must show that any protection offered by the clause is reasonable. Specifically, the clause should offer ‘no more than adequate protection’ to the benefit of the employer.

 

Whether a clause is reasonable depends heavily on the broader employment relationship. An employer should take into account factors such as the employee’s position, work responsibilities, position in the hierarchy and experience in drafting a non-solicitation clause or clause not to compete and ensure it is reasonable.

 

These factors should influence the duration and/or the geographical scope of any such clause. These factors should also impact the extent of the restrictions – such as which parties an employee is restricted from soliciting in a non-solicitation agreement, and which industries an employee is prohibited from working in through a clause not to compete.

 

The determination of whether a non-solicitation clause and clause not to compete protects a legitimate interest and is reasonable depends heavily on the meaning of the clauses. Ambiguity may lead to a finding that legitimate interest is not protected or that the clause is not reasonable.

 

3. Example non-solicitation agreement (clause):

 

As this article has so far suggested, drafting a non solicitation clause that is enforceable can be challenging. A properly drafted non-solicitation clause must clearly evince the employer’s legitimate interest and must be reasonable. To help you, here you can find an exemplar non-solicitation clause: 

 

The Employee agrees that he will not solicit or approach any of the Company's customers, clients, manufacturers or suppliers for up to three months upon the discharge of this Employment Agreement. The Employee recognizes the Company's legitimate business interest in respect of the Company's customers, clients, manufacturers and suppliers and as such agrees that any breach of this Clause shall entitle the Company to injunctive relief and/or liquidated damages and/or account of profits for any said breach, or otherwise.  This Clause 11 shall survive any termination of this Employment Agreement”

 

 

Non-Compete and Non-Solicitation Agreement Templates (FREE): 

 

DocPro offers numerous non-compete and non-solicitation agreements for employers and employees to use. We offer numerous variations of this agreement differing based on the party – the employer or employee – they are drafted in favour of.

 

These agreements are also ‘unilateral/one way’. This means, only the employee is subject to non-solicitation/non-compete obligations. The employer is not subject to these obligations:

 

You can find a brief description of each of our agreements and links to them here:

 

Non-Solicitation Agreements in Employment Contracts Templates:

 

DocPro offers employment agreement templates with comprehensive non-solicitation agreements included. Each variation of employment agreement differs based on the party they favour – the employer or employee – and differs to reflect whether share options are granted to employees or not.

 

You can find and select a suitable employment agreement template here: https://docpro.com/cat35/human-resource-employment/employment-contract-joining-letter-offer-letter

 

 

Please note that this is just a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may want to speak to your lawyer

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