What is a non-solicitation clause?
A non-solicitation clause, typically found in employment contracts, prevents one party from soliciting or enticing employees, clients, customers or suppliers of another party. In an employment context, a non-solicitation clause is designed to prevent an employee who leaves a company from directly or indirectly soliciting other employees to join them at their new place of work. Similarly, in a business context, a non-solicitation clause might include prohibitions on approaching clients of a former employer with the intention to entice them away to the former employee’s new place of work.
A non-solicitation clause aims to protect the interests of the business party that has invested time, effort, and resources into building relationships or developing a workforce.
Recently the Court has concluded that the meaning of “solicitation” includes when an ex-employee of a business is contacted first by a current employee, client or supplier of the business. In Barrett v Ecco Personnel Pty Ltd NSWCA (1998) the Court found that although the former client of the respondent provided a “window of opportunity” to engage in business with the previous employee, there was still a breach of the non-solicitation clause and the former employee had “solicited” the client in a professional capacity. This case highlights the potential strength and breadth of non-solicitation clauses.
What is a non-compete clause?
Non-compete clauses prevent an employee from working for or starting a business that competes with their former employer within a specific geographical area and for a certain period after leaving their employer. These clauses are designed to protect businesses from former employees using the proprietary knowledge, trade secrets, and specialised skills developed during the period of employment. The past 15 years have seen a sharp growth in the use of non-compete clauses across the developed world, with economists increasingly arguing that this has contributed to diminished productivity growth in these countries.
Current trends and government action
The current Labor Government is considering a ban or heavy restriction on the use of non-compete clauses by employers as they argue that this prevents employees moving to better-paying jobs or taking their skills to more innovative competitors. The Government argue that this is stifling the economy.
Federal Treasurer Jim Chalmers said the government was looking closely at the decision by the United States Federal Trade Commission (FTC) to ban non-compete clauses, which is expected to raise an average worker’s earnings and increase economy-wide productivity in the United States.
Data compiled by the ABS revealed about 20 percent of the nation’s workforce maybe affected by non-compete clauses. This proportion increases in the financial services and real estate sectors, where at least a third of employees have a non-compete provision in their contracts.
Independent think tank e61 Institute has found that the use of non-compete clauses have expanded across Australia, affecting various roles from senior positions in law and finance to childcare workers, yoga instructors, and IVF specialists.
Competition Minister Andrew Leigh highlighted the FTC’s findings that the potential banning non-compete clauses may be beneficial for startups and employees, with estimates that this could stimulate new business formation growing in the United States by 2.7 percent a year. This line of thought aligns with broader Australian government reforms aimed at enhancing competition, economic growth, wages, and innovation.
Given this context, it may be worthwhile considering whether a non-solicitation clauses are used now to protect a business in the future in the light of these proposed changes. However, non-solicitation clauses must be used with caution and drafted carefully to avoid being held unenforceable if ever challenged by the courts. Any restraint that goes beyond what is reasonably necessary to protect a legitimate business interest will be void. Below are identified some key elements that contribute to a strong non-solicitation clause.
Important considerations when drafting a non-solicitation clause
Scope and duration
One of the most common ways in which a non-solicitation clause will be held unenforceable is when it restricts too many activities for too long or over too great a geographical location. Therefore, you must carefully determine the scope and duration of the non-solicitation clause. Will it apply only to clients or customers, or will it also include employees and contractors?
Geographic limitations
Consider whether the non-solicitation clause will be limited to a specific geographic area or it if will apply globally, noting that it must only be what is reasonably necessary to protect a legitimate business interest.
Specificity
Courts may deem overly broad non-solicitation clauses as unenforceable. Ensure that the clause does not unreasonably restrict employees from pursuing their careers after leaving the company.
Legality
Non-solicitation clauses must comply with relevant laws and regulations.
Communication
To avoid future conflicts and possible legal actions, clearly communicate the existence and terms of the non-solicitation clause to all relevant parties, such as employees, contractors, and clients/customers at the date that you enter these clauses with the relevant parties.
Enforcement
If a violation does occur, having a plan for enforcing the non-solicitation clause, such as legal action or seeking injunctive relief, may make the process more seamless and reduce the extent of the conflict.
Key takeaways
By carefully considering the factors above, and drafting the non-solicitation clause accordingly, you can help protect your company’s interests. The same goes for non-compete clauses but it is important to consider these in the current economic context and the possibility of future government action. It is advisable to seek professional legal advice to review your contracts to ensure they are clear, enforceable, and comply with applicable laws. If you would like to speak to our experienced Workplace + Conduct team at Morgan + English, please reach out to Daniel Morgan (daniel@morganenglish.com.au) today.
