Non-compete and non-solicitation terms are often misunderstood. And regardless if you are running a small freelance business or a high-growth startup, you need to understand the differences between these restrictive covenants.
A non-compete agreement is a restrictive covenant that prevents an employee from terminating her employment and opening or working for a business that competes with her employer.
A non-solicitation agreement, on the other hand, is a restrictive covenant that prevents an employee from terminating her employment and asking her employer’s customers to follow her. Non-solicitation agreements can also prevent that employee from asking her co-workers to join her.
(Note that it is common for these restrictions to be included somewhere within a larger agreement – whether an employment agreement, an employee handbook, or somewhere else.)
Virtually all states will enforce both non-compete and non-solicitation agreements. However, a small number of states, like California, refuse to enforce them in order to promote economic growth through labor mobility.
Both Missouri and Kansas will enforce these restrictive covenants (Missouri even has a statute that allows employers to use restrictive covenants).
However, no state will enforce restrictive covenants that are unreasonable. Further, the covenants will only be enforced if they are designed to protect legitimate business interests of the employer.
For example, non-compete restrictions must be limited by both geographical limitations (often 50-100 miles) and time limitations (often 1 or 2 years). And with respect to non-solicitation of clients, some courts will limit the restriction to clients with which the employee had actual contact during her employment.
Since state enforcement of restrictive covenants vary, it is always good to contemplate using all three restrictions in your agreement to provide your startup or small business with a broad base of protection. When we mention all three, we mean a non-compete, non-solicitation of employees, and non-solicitation of clients.
Additionally, you should work with an attorney to make the restrictions both practial and reasonable. Using an unreasonable restrictive covenant can easily lead to a dipsute that can be a burden on your business and personal life.
Last, we’d like to close with our personal opinion.
Generally speaking, non-compete agreements can have very negative effects on local economies. They limit labor mobility and can drive down wages. They can also cause highly talented people to move away from communities that enforce them in favor of communities (like California) that don’t. That’s why we don’t encourage non-compete agreements in every situation. Sometimes they are needed, sometimes they are not. However, we do support non-solicitation of clients in most circumstances.
Image: Adobe/Gstudio Group
*This article is very general in nature and does not constitute legal advice.