Understanding Nonsolicitation Agreements
Can employers prohibit employees from soliciting coworkers and customers to a new employer?
A nonsolicitation agreement is a contract in which an employee agrees not to solicit a company’s clients or customers, for his or her own benefit or for the benefit of a competitor, after leaving the company. A nonsolicitation agreement can also include an agreement by the employee not to solicit other employees to leave when he or she quits or otherwise moves on.
Often, a nonsolicitation agreement is part of a larger document, such as an employment contract, a noncompete agreement, or a nondisclosure agreement. But it doesn’t have to be. An employer that wants to protect only its customer list, for example, might use a standalone nonsolicitation agreement.
A nonsolicitation agreement might be presented to you at any stage of the employment relationship. For example, an employee might be asked to sign a nonsolicitation agreement as part of a severance package. However, some companies include a nonsolicitation agreement in the stack of paperwork it asks new hires to sign.
When a Nonsolicitation Agreement Is Used
Nonsolicitation agreements are especially common in service or sales businesses, particularly when the customer pool is limited. For example, a company that specializes in providing parts and service for an expensive model of hybrid SUB can’t just go out and drum up more business: Only people who are local and own that vehicle will have a need for the company’s services.
Even if there are many customers for a company’s products, it might want a nonsolicitation agreement if it sells something that isn’t unique and competes primarily on price. In this situation, an employee who knows the company’s pricing schedule has a unique advantage in soliciting customers, because he or she knows exactly how sweet the offer has to be to woo customers away.
What Makes a Nonsolicitation Agreement Enforceable
First of all, state law may not allow an employer to require employees to sign a nonsolicitation agreement. For example, the California Supreme Court has held that nonsolicitation agreements that prohibit employees from soliciting their former employer’s customers are void – unenforceable – as a matter of the state’s public policy. California law places a very high premium on competition in the open market and employee mobility. If an employee can’t compete for a former employer’s customers, this policy is thwarted.
Outside of California, however, nonsolicitation agreements are likely to be enforced as long as they don’t make it too difficult for an employee to earn a living or unfairly limit a competitor’s ability to hire workers or attract customers through legitimate means.
To be enforceable, an agreement must meet these requirements:
- The employer must have a valid business reason. Such a reason might include protecting a valuable customer list, protecting trade secrets or other valuable information, or protecting the company from the mass departure of valuable employees with specialized skills, knowledge, and access to trade secrets.
- The customer list must be worth protecting. If the purpose of a nonsolicitation agreement is to protect the company’s customer list, the company must have spent time, energy, and money establishing its client database – and it must contain information that isn’t readily available to the general public. If anyone could figure out who a company’s customers or clients are just by looking in the phone book, a court probably won’t protect the customer list.
- Employees and customers can leave voluntarily. Nonsolicitation agreements can’t prevent a client, customer, or employee from moving to a competitor voluntarily. There isn’t much a company can do to stop its other employees from leaving to join a former employee at a new company, as long as the departing employee hasn’t improperly solicited them (and the employees aren’t subject to enforceable noncompete agreements). Similarly, if customers want to take their business to a competitor, a nonsolicitation agreement isn’t going to be much help, unless the departing employee has improperly pressured them or used the former employer’s information (such as a price list) to get their business.
If You Are Asked to Sign a Nonsolicitation Agreement
If an employer asks you to sign a nonsolicitation agreement, read it carefully. If you have any questions about what it requires, or you believe it goes too far in limiting your options once you leave your job, talk to a lawyer. This area of law is changing all the time, and the rules are set by state statutes and court decisions. An experienced local lawyer can help you figure out whether the agreement is legal – and what you should do if an employer makes signing it a condition of employment.
A special note to California employees: California law on this issue is very protective of employee rights, so consider it a real red flag if you are asked to sign a nonsolicitation agreement. Consult with an experienced employment lawyer to find out how to proceed. If you are required to sign an illegal agreement as a condition of getting or keeping a job, the employer might be exposing itself to legal liability, even if the employer never tries to enforce the agreement. A lawyer can help you figure out your options here.