Close the skill gap with the Financial Modeling & Valuation Analyst (FMVA)® Certification >> Enroll today and save!

Non-Solicitation Agreement

A clause that restricts a former employee from soliciting current staff and customers after departure

What is a Non-Solicitation Agreement?

A non-solicitation agreement is a contract that restricts an individual (typically a former employee) from soliciting employees or customers after the employee’s departure from the business. A non-solicitation agreement can be in the form of an entire document or a clause in an employment contract.

 

Non-Solicitation Agreement

 

Non-Solicitation Example

Before John’s employment, he needed to sign an employment contract that included a non-solicitation agreement clause.

John works in the sales business and is a salesperson for Company A. John uses a list of sales contacts provided by the business, whom he can contact. Recently, John decided to leave Company A and join another company – Company B. Company B also is in the sales business and sells products similar to those of Company A. If John decides to use the contact list given by Company A in his new sales position at Company B, he can be sued for violating the non-solicitation contract he signed.

In the example above, the agreement is used to prevent former employees from soliciting customers and drawing them away from the business the employee formerly worked for.

 

Importance of a Non-Solicitation Agreement

To a company, their employees and customers are important. Companies use non-solicitation agreements to restrict former employees from soliciting customers or staff. The agreement serves two main purposes:

  1. To restrict former employees from soliciting customers. This is illustrated in the example above.
  2. To restrict former employees from soliciting employees. For example, John is leaving his job at Company A and attempts to solicit his administrative assistant to work with him at the new company. If John signed an agreement not to solicit employees, the company can file a breach of contract lawsuit.

In essence, a non-solicitation agreement is used to protect a company’s revenues and, specifically, to prevent employees from soliciting clients or employees from their previous employer.

 

The Difference Between Non-Competition and Non-Solicitation Agreements

A non-competition agreement and a non-solicitation agreement are often regarded as the same thing. Non-solicitation clauses in employment contracts are also sometimes referred to as a “non-compete clause”. However, there are actually distinct differences between a non-compete agreement and a non-solicitation agreement. A non-competition agreement is used to prevent a former employee from working for another company in the same industry, one that would be a competitor of the employee’s previous employer, while a non-solicitation agreement is used to prevent the former employee from soliciting a former employer’s clients or staff.

 

Non-Competition Agreement

 

Enforceability of a Non-Solicitation Agreement

The enforceability and legality of a non-solicitation agreement remains a controversial subject. A non-solicitation agreement may be enforceable if the agreement is clear, unambiguous, and reasonable considering the employee’s position.

If the agreement is ambiguous or includes unfair terms, it will not be enforceable in court. There must be a legitimate business reason to require an employee to sign a non-solicitation agreement.

For example, in the court case Phoenix Restorations Limited v. Brownlee 2010 BCSC 1749, Phoenix pursued a temporary order by a court of law to enforce a non-solicitation clause.

The clause was as follows:

“[Employee will not] … solicit, divert or hire, or attempt to solicit, divert or hire, to the competitive entity, any individual or entity, which was an actual or actively sought prospective client or customer of the company.”

The Court refused to honor the clause because it covered all clients and aspects of Phoenix’s business. Therefore, the clause was considered too broad to be reasonable and could not be enforced. The clause would probably have been enforceable if the company had left out the “prospective” part, which basically broadened its customer base to include not only actual customers, but also people who might become customers in the future.

In order for it to be enforceable, courts often require that a non-competition or non-solicitation clause be reasonably time-limited as well. For example, a more likely to be enforceable non-compete agreement might prohibit former employees from working for a competitor for a period of two years after leaving the employer whom they signed the non-compete agreement with.

 

Other Resources

Thank you for reading CFI’s guide to non-solicitation agreements. To further your financial education, the following resources may be helpful.

  • Knowledge Workers
  • Non Disclosure Agreement
  • Managing Conflicts
  • Confidentiality Agreements in Investment Banking

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!