Protecting Your Business: The Ins and Outs of Non-Solicitation Agreements and Covenants Not to Compare

Every business maintains relationships with contacts like customers, clients, suppliers and hold proprietary information that contributes to their success. As such, when employees depart from companies, it is in every business's best interest to ensure that these relationships and information are protected. This can be done through non-solicitation agreements and Covenants Not To Compete. Non-solicitation agreements are agreements that prohibit employees from soliciting the employer’s customers after they leave. Covenants Not To Compete are agreements where employees agree to not work for the other party’s competition after leaving. Whilst they sound similar, they are different in some respects and must be differentiated correctly.  

 

If you are confused between Non-Solicitation Agreements, Covenants Not To Compete, and what differentiates them, don’t worry. This guide will outline different ways employers can protect themselves and will also provide sample non-solicitation agreements and covenants not to compete, which can be used as references.

 

 

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 to not contact or approach customers, suppliers, and employees of the employer, with any intention of establishing business relations. Despite being called non-solicitation agreements, they are mostly found as a clause in employment contracts.

 

Employers include these clauses in employment contracts because they help maintain value in their business. Employers spend considerable time, money, and effort in developing strong relationships with suppliers, customers, consultants, etc. These strong relationships often contribute greatly to the success of the business. However, employees are also often introduced to and interact with these suppliers, customers, and consultants, enabling them to forge close relationships with them, sometimes ones even closer than the employers. This poses a risk for employers when employees leave the business – employees may try to leverage these relationships to obtain their business for their benefit.

 

Employers should therefore mitigate this risk by including a non-solicitation agreement in employment contracts. Non-solicitation agreements restrict the ability of employees from contacting the employer’s suppliers, customers, and employees to obtain their business or services. Non-solicitation agreements are effective during employment and after the end of the employment relationship.

 

If the employee nonetheless contacts these parties, this constitutes a breach of the non-solicitation agreement. In this case, the employer is entitled to go to court and seek remedies, which include damages (money to compensate the employer for any loss caused by the employee) or injunctions (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 customer, supplier or employee intending to acquire their business or services for their benefit. 

 

An employee’s efforts to solicit an employer’s customers/clients can sometimes be obvious. For example, an employee who is about to leave a 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?”. Obvious examples of solicitation like this are coined ‘direct solicitation’.

 

An employee’s efforts to solicit an employer’s contacts can, however, be very subtle; this is called ‘indirect solicitation’. An example of this is where an employee procures a third party to contact his ex-employers customers/suppliers. An employee that advertises 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 constitute a solicitation. 

 

Whether the acts of an employee are ‘solicitation’ and therefore a breach of a non-solicitation agreement, or whether it is an 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 effective during employment and after the end of the 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.

 

In deciding how long non-solicitation agreements should be effective, employers should consider how long it will take them, 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:

 

• State of the employment market – the longer it takes 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 likely built 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.

• The 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. Some examples of client-facing industries include the services and sales industries. 

 

Employers who operate in industries where businesses rely heavily on customer loyalty, like hair salons and beauty parlours, should also ask employees to sign non-solicitation agreements. Customers in these industries are more prone to be loyal to employees due to the nature of the job. In these industries, without proper protection, employees can simply leave and poach clients and customers for their 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 are both considered to be ‘restrictive covenants. ‘Restrictive Covenants’ is the label used for terms that restrict a person from taking 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 in one respect – that is, in how they restrict the employee. A non-solicitation agreement restricts an employee from seeking to engage in commercial relations with the employer’s key business contacts. Covenants not to compete, on the other hand, restrict an employee from establishing a business or partake in work for an employer in competition with the employer.

 

 

6. Are non-solicitation agreements enforceable? (the 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 in which the employee agrees not to work in competition with the employer. It restricts the employee from working in a competition with an employer either by opening his/her own business or working for an employer in direct competition with the employer.

 

Covenants not to compete are normally effective both during employment and after the employment relationship ends.

 

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

 

To understand when to use a covenant not to compete, it is important to first understand its purpose. Covenants not to compete serve a much broader purpose than non-solicitation agreements.

 

Like non-solicitation agreements, they help ensure that an employer’s customers, suppliers, and employees are not poached by an ex-employee. In addition to this, however, covenants not to compete protect confidential/proprietary information and trade secrets of an employer from being used by an ex-employee for their benefit.

 

As such, employers in client-facing industries, small markets, and industries where businesses depend on loyalty might want to consider subjecting employees to clauses not to compete. On a more general level, employees who are exposed to confidential information and trade secrets during 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 mentioned, covenants not to compete are effective both during employment and after the employment relationship ends. They should not, however, be effective indefinitely.

 

Covenants not to compete, like non-solicitation agreements, should only remain effective for a limited period. In deciding how long a clause not to compete should be effective, an employer should consider 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 like tech, confidential information and know-how tends to be outdated quickly and is often made public. Covenants not to compete in these fast-moving industries should therefore be shorter than those in slower-moving industries where confidentiality must persist for longer periods.

• 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 that employers 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 the employer is dealing with a to-be hired employee who has yet signed an employment contract with the employer, we recommend the employer insert a non-solicitation agreement and clause not to compete into the employment contract. By inserting these clauses into the employment agreement, employers will be able to make both non-solicitation and non-competition 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 thus 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, the employee is providing something of value to the employer: he is undertaking the obligation to not solicit clients/customers of an employee in a non-solicitation agreement. The 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 mentioned earlier, non-solicitation agreements and covenants not to compete are both examples of restrictive covenants. As such, the same rules apply 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 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 whomever 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 to prevent/reduce 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 the 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 consider 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 influence the duration and/or the geographical scope of any clause. These factors should determine 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 you might have realised, drafting a non-solicitation clause that is enforceable can be challenging. A properly drafted non-solicitation clause must evince the employer’s legitimate interest and must be reasonable. To give you an example of what this might look like, here is 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): 

 

We have created 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-Compete and Non-Solicitation Agreement for Employment. This agreement is drafted neutrally in favour of both the employer and employee. You can find it here: https://docpro.com/doc1341/non-compete-and-non-solicitation-agreement-for-employment-one-way-unilateral-neutral

• Non-compete and Non-solicitation agreement for employment. This agreement is drafted in favour of the employer. You can find it here: https://docpro.com/doc1342/non-compete-and-non-solicitation-agreement-for-employment-one-way-unilateral-employer

• Non-compete and Non-Solicitation Agreement for Employment. This agreement is drafted in favour of the employee. You can find it here: https://docpro.com/doc1344/non-compete-and-non-solicitation-agreement-for-employment-one-way-unilateral-employee-1

 

Non-Solicitation Agreements in Employment Contracts Templates

 

We offer 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.