Introduction
Welcome to the Simplifying Legal podcast, brought to you by Businessese. I’m your host, Danielle Liss.
Many years ago, someone told me I was the least lawyer-y lawyer she’d ever met because I helped make legal easier to understand. To this day, it’s one of the best compliments I’ve received in my professional life.
If you’ve ever felt legal was too scary, too overwhelming, too complicated, or just plain incomprehensible, you’re not alone. The Simplifying Legal podcast was created to help.
In each episode, we’ll do a deep dive into a legal topic and give you concrete next steps so you can apply it to your business.
My goal is for you to walk away from each episode thinking, oh, that was easier than I thought it would be.
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Episode Content
Hey there, I’m Danielle. Welcome to episode 14 of Simplifying Legal for Small Business Owners. In Episode 8, we kicked off a series on contracts and we’ve discussed a number of different contract clauses over the past several episodes. In this episode, I’m focusing on non-compete and non-solicitation clauses. As a small business owners, it’s really important for you to know how to properly use these clauses
Disclaimer: As always, before we get into today’s topic, a quick disclaimer. This podcast is meant to provide you with legal information only. It’s not legal advice and does not create any type of attorney-client relationship between us. Please don’t take any action without consulting your lawyer first.
Now let’s talk about non-compete and non-solicitation clauses.
First, let’s define what non-compete and non-solicitation mean. Then we can discuss what you need to know and how these are often used in agreements.
Non-Compete Clause vs Non-Solicitation Clause
A non-compete clause typically appears in an employment agreement, although it may also be a separate non-compete agreement, and it restricts an employee’s ability to engage in certain types of activities. Most often, a non-compete will restrict the employee from working with a competitor or from starting a competing business.
A non-solicitation clause typically restricts an employee’s ability to solicit either employees or customers in the event that they leave the company.
Non-compete and non-solicitation clauses are often appealing because, as a business owner, you want to protect your business. However, you do need to exercise caution when using these clauses, especially non-competes.
Many states have enacted legislation that puts limitations on non-compete clauses because it can be seen as preventing competition. Additionally, it makes it harder for someone to find a new job if there is a broad non-compete in their agreement.
If you’re considering including these types of clauses in your employment agreements, you first need to ensure that use of this type of clause is permitted under your state’s laws.
To make this even trickier, some states generally allow non-competes, but there are certain exemptions built into the law that means a particular type of field might not be covered, like a physician.
For purposes of this episode, I’m going to discuss non-competes and non-solicitation clauses as though they are permitted in your agreements. However, before you decide to use one, you need to ensure that they are allowed for your company.
As always, if you aren’t sure about your states’s laws, you should do some research or talk to a local employment attorney who can help to guide you.
Okay, now that I’ve given you all the warnings, let’s talk about how these clauses may look in your agreements. Let’s start with the non-compete.
Non-Compete Clause Agreement
In a non-compete, you want to ensure that your clause is reasonable. Even if you’re able to use a non-compete in your state, courts will find a clause unenforceable if it’s overly restrictive. You need to ensure that you are balancing the needs of your business with the employee’s right to make a living.
Before you start drafting the clause, consider what you’re trying to protect in your business. Do you want to prohibit someone from taking the training that you’ve provided to them and giving that information to a competitor? Or, are you more concerned that the employee will try to create a competing product, rather than going to work for a competitor? It’s important to consider your goals so that you can create a reasonable non-compete that will be enforceable.
Once you’ve considered your goals in including this type of clause, consider the following:
- How long will the clause be in effect?
- What actions are prohibited?
- Will you give the former employee the ability to get your authorization?
Let’s look at each of these.
Clause Term
First, how long will the clause be in effect? You need to ensure that the time you’re requesting is reasonable. For many, it might be for the term of the agreement and 6 months after. Make sure that the timing isn’t so excessive that it will be overly restrictive since it could make your clause unenforceable.
Prohibited Actions Outlined within the Agreement
Second, what actions are being prohibited? Often, non-competes are based on the following:
- Working for a competing business
- The geographic region, or
- Creation of competing products.
First, let’s talk about competitive businesses. In this case, you may state that an employee cannot work for a direct competitor for a certain period after the agreement. It should be clear as to which companies you consider a competitor, so you may want to list the business types.
Next, it’s also common for a non-compete to include a geographic region, if your business has a physical location. For example, it might state that the employee cannot work for a competitor within a 20 mile radius. Or, it might state that they cannot start a similar business in a certain radius.
If your business is online, including a geographic region might not make sense.
Authorization and Exemption
And, last, will you give the former employee the ability to get your authorization in order to get an exception to the clause? Many employers may want to protect their competitive advantage, but they also want to ensure that they aren’t being overly restrictive, so they will include language that states that if the employer reviews it and deems it is not competitive, the employer may give written authorization for a particular activity.
So, let’s review an example of a fairly basic non-compete clause. Here, let’s assume that the employer’s business was an online business focused on information products related to pediatric dietetics.
This clause might say:
Employee agrees that during the term of this Agreement, and for six months following the termination of this Agreement, Employee shall not launch any competing products to those offered by Company, including an online course focused on pediatric dietetics, without express written agreement from Company.
This example provides a specific duration that isn’t unreasonable. It’s specific about what activity is prohibited and it keeps the definition narrow to allow the company to protect itself. And, it gives the company the ability to approve something.
In this situation, it may be that the former employee wants to create an information product that is related to pediatric dietetics, but it’s not similar to the content that company has in its products. In that case, company may offer its approval.
Non-Solicitation Clause Agreement
Now, let’s move our focus to a non-solicitation clause. As I said earlier, a non-solicitation clause is focused on ensuring that a former employee cannot solicit a company’s team members or clients.
Clause Term
Like a non-compete, in a non-solicitation clause, you need to consider the duration, what’s prohibited, and if you are going to allow for a potential exception.
Duration in a non-solicitation clause is often similar to that of a non-compete. The term plus a period of time thereafter. Again, consider what duration would be reasonable.
Prohibited Actions and Authorization Outlined within the Agreement
For the prohibited activities, it will typically state that the employee is prohibited from soliciting team members or customers of the company.
In some cases, the company may want to include the ability to grant authorization.
An example of a fairly typical non-solicitation clause is:
Employee agrees that during the term of this Agreement, and for one year following the termination of this Agreement, Employee shall not directly or indirectly solicit or attempt to solicit any customers or employees of Company, other than on behalf of Company itself, without express written agreement from Company.
This includes the duration, which is the term of the agreement and one year following. It states what’s prohibited – soliciting employees or customers of the company. And, it gives the company the ability to give authorization to do so.
For example, if the employee leaves to start a new business that is not competitive with the company, the company may say that it’s okay to contact the company’s former customers as long as it is not for a competing product or service.
Using non-competes and non-solicitation clauses can be a great way to help you protect your business. Make sure you’re carefully considering your company’s needs and creating clauses that aren’t overly restrictive, and therefore, potentially unenforceable.
Action Steps
Now, let’s review today’s action steps.
Are non-competes allowed in your jurisdiction? Are there any restrictions on non-solicitation clauses? Make sure you know the law for your state.
- A number of states have updated their laws regarding non-competes in the past few years. If you are using an employment agreement that was drafted prior to 2016 and it includes a non-compete or non-solicitation clause, you may want to ensure that no changes in your state’s laws have impacted your agreement.
- If you’re using a non-compete or non-solicitation clause, review the wording to ensure that they are reasonable and not overly restrictive. If you need to make changes, update your agreements.
- Since this is an area that is sometimes confusing, your action step may be to consult with an employment attorney in your state who is familiar with the laws and any potential exemptions.
Thanks for joining me for today’s discussion on non-compete and non-solicitation clauses. In the next episode, we’re continuing the contract series with an overview of the many boilerplate clauses you see in contracts. We’ll talk about what they mean and what to look for when you encounter them in your agreements.
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