When and How to Use a Nonsolicitation Agreement
When and How to Use a Nonsolicitation Agreement
When you hire employees or negotiate a merger or acquisition between companies, you want to create an agreement that protects your company. One important way to do this is with a nonsolicitation agreement, a legal document that prevents another party from trying to hire, get business from, or obtain information from your business's employees or customers.
When to Use Nonsolicitation Agreements
Your employees interact with one another, and many have access to your customer list. If an employee leaves the company, they could easily start a competing business by hiring away your staff and taking your customers. A nonsolicitation agreement prevents either of these situations from happening legally. It's important to note that state laws about employee nonsolicitation agreements vary. In California, for example, such agreements are generally unenforceable unless they involve trade secrets.
An employee nonsolicitation agreement should be part of your employee agreement and any contracts you have with independent contractors. If your business is considering a merger, acquisition, or sale, information about your customers and employees may be shared during negotiations. The other party could use this information to compete against you during the negotiations, if the negotiations fall through, or even after a deal is done. Putting a nonsolicitation agreement in place protects your business.
Nonsolicitation Agreements vs. Other Agreements
A noncompete clause is generally broader than a nonsolicitation agreement and prohibits someone from setting up a competing business. A nonsolicitation agreement, on the other hand, is more specific and prevents the other party from contacting employees or customers.
A confidentiality agreement, also known as a nondisclosure agreement, is also broader than a nonsolicitation agreement. Often a nonsolicitation agreement is included within the confidentiality document, which prohibits the other party from taking or using your confidential business information and requires them to keep it private.
Legal Requirements for a Nonsolicitation Agreement
To create a valid nonsolicitation agreement, you must meet the following three criteria:
- Have a valid business reason for the agreement. You must have something worth protecting, such as a customer list or employees with valuable skills or knowledge about your business.
- Have confidential information that you want to protect. The customer list or information about employees can't be covered by a nonsolicitation agreement if you've made it public (for example, by publishing a list of customers on your site): it must be information you've made some effort to keep private by investing time, money, and/or energy.
- Include a statement that employees and customers are not prohibited from voluntarily leaving their jobs or business relationship with your company and going to work with a competitor. The nonsolicitation agreement just prevents the other party from asking your employees to leave.
Elements of a Nonsolicitation Agreement
There are certain elements a nonsolicitation agreement should have. Because each business and each state is different, it is a good idea to work with an attorney or purchase a nonsolicitation agreement template that can be tailored to your specific situation. If you create your own, be sure your agreement includes the following:
- Scope of the agreement. Specify what is meant by soliciting, such as contacting a customer for the purpose of getting their business or talking to an employee with the purpose of hiring them. The wording could also specify the type of employees that cannot be solicited since not all employees are critical.
- Duration. The agreement must have a specified end date. For employee nonsolicitation agreements, the end date should be within two years of the date the employee leaves the company, so that they are able to continue their career. It's also useful to include a clause that the agreement will continue even if the employee is moved to another job within the company.
- Geographic area. The document should specify the region in which the company does business and, therefore, in which the agreement applies. You can provide a radius around your business in which customers cannot be solicited, for example.
- Reasonableness. The agreement must be reasonable and not create an undue burden on the other party. For example, it can't prohibit an employee from publicly looking for work in a way that might be seen by the company's customers, such as via LinkedIn. The agreement cannot prevent an employee from being able to earn a living in your field after leaving your company.
Enforcing a Nonsolicitation Agreement
If a nonsolicitation agreement is breached, you can sue for enforcement and seek an injunction to get the other party to stop what they are doing, such as contacting your customers or employees. You can also sue for damages your company experiences because of the breach.
A popular clause in a nonsolicitation agreement is a liquidated damages clause, which states a set amount of money the other party must pay if they breach the agreement. Although this prevents you from having to prove the actual amount of damages you have suffered, such a clause is not enforceable in all states.
A nonsolicitation agreement ensures that your business can remain stable and secure by limiting the types of contact with your employees by other people you do business with. A robust and complete agreement offers the most protection.