This article has been written by Namrata M K, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho and edited by Shashwat Kaushik.

It has been published by Rachit Garg.

Introduction

An employment contract is an agreement between the employer and an employee that specifies the length of employment, remuneration, rights and responsibilities, termination of the contract, etc. It helps both parties come to a settlement in the event of a future dispute. This is one of the most important contracts because it delineates the rights and duties of the employer and employee. There are various clauses in an employment contract, and some of them are as follows:

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  1. Appointment
  2. Terms and conditions
  3. Rights and duties
  4. Salary and benefits
  5. Compensation
  6. Notice
  7. Confidentiality and non-disclosure clauses
  8. Restrictive clauses 
  9. Termination

The clauses in an employment agreement change with the agreement itself. Each contract will demand a different set of clauses. A non-solicitation clause comes under restrictive clauses, i.e., it seeks to restrict former employees of a company from soliciting their previous colleagues or customers or any ideas that they gained from such employment to benefit themselves after their termination from such a company.

What are employment contracts

Employment contracts are entered into by employers and employees before they join the company. An employment contract lays down the most important matters concerning the employment of the employee. This lays down rules and obligations to be followed by the employee and also lays down the consequences of not doing so. So in a way, this contract acts as the foundation on which the employee works for the employer. Employment contracts can be written or oral. There are various employment contracts, and some of them are:

  1. Full-time employment- This is an employment contract wherein the employee is supposed to work a minimum number of hours a week, and it is usually given to permanent employees.
  2. Part-time employment- In this type of contract, employment is usually given to temporary employees or workers who work fewer hours compared to permanent members.
  3. Fixed employment- In this type, the period of employment is fixed. The starting date and an ending date are mentioned in the employment contract.
  4. Zero-hour employment- In this type of employment, the employer calls the employee in hours of need and is paid on that basis.
  5. At will contract- As the name suggests, employment can be terminated by either party without notice or cause.

An employment contract usually discusses matters such as terms and conditions of employment, salary, specific tasks, benefits, compensation, probation, termination, etc. Apart from these matters, it may also contain certain other clauses, such as non-compete clauses, non-solicitation clauses, and confidentiality clauses. Non-solicitation clauses are taken into consideration when an employee is terminated. What non-solicitation clauses are and how they are enforced are discussed below.

Meaning and definition of non-solicitation clause

The word “solicit” means to make a petition. A non-solicitation clause in an employment contract is a clause that restricts a former employee of the company after his termination from poaching any previous clients, other colleagues, or any other ideas of the employer to benefit his own needs. So basically, what this clause does is protect the employer from any act of the former employees that seeks to extort its other employees or customers. Non-solicitation clauses are those that come into effect after the termination of an employee. A non-solicitation clause is similar to a rule in a contract that prohibits you from trying to take clients, associates, or business prospects from your present company if you quit.

A non-solicitation clause is a contractual condition that prohibits workers from actively pursuing specific companies or individuals from their previous workplace for a predetermined amount of time and within predetermined geographic boundaries following their departure from the company. The purpose of the non-solicitation clause is to safeguard the employer’s stability, business relations, and confidential information by prohibiting outgoing employees from attracting clients, customers, or coworkers to a rival company. These clauses are designed to address certain specific concerns and challenges that may arise when an employee is terminated from employment.

For example, let’s say Mr. A, who has been working for the company ABC for the past 15 years, has been terminated. After his termination, he started his own company and started to solicit the employees of his previous employment. Now that the employment agreement entered into by Mr. A and the company ABC contains a non-solicitation clause that prohibits such solicitation by Mr. A, the company can proceed against Mr. A for going against the employment contract.

Need for non-solicitation clause in employment contracts

The need for non-solicitation clauses can be studied with an example.

Suppose Mr. A, an employee of company ABC, is terminated, and after the termination, he starts his own company that is more or less concerned with the same business. He started soliciting his former employees to quit their jobs and join his company. Under these circumstances, without a non-solicitation clause, it is difficult for the company to take any action against Mr. A. Whereas if the employment contract had a clause that prohibited the former employees from soliciting, then it would have been easier for the company to take action against Mr. A.

Therefore, one of the needs for a non-solicitation clause in an employment contract is that it makes it easier for the company or employer to take action against such former employees who try to lure their present employees or their clients or customers.

  • A non-solicitation clause also ensures that once an employee is terminated, he will not be able to disclose the confidential information that he had with him while he was part of the company. It prevents former employees from disclosing any information related to the company to any third party after their termination.
  • This clause indirectly brings stability to the company. It prevents other employees from quitting their jobs because of the influence of the former employee.
  • It also provides for compensation or other reliefs to be provided to the company or third party in case of a violation of this clause. If the terminated employee discloses the confidential information concerned to any third party, then the clause must contain terms and reliefs to be sorted out for the company as well as the third party concerned.
  • In highly competitive industries, having staff that is not easily accessible to competitors can provide an advantage. Non-solicitation agreements help to preserve this benefit in part.

Non-solicitation clauses in an employment contract provide the company with a lot of benefits when there is a termination of an employee. It protects the relationship between companies and other employees, clients, or customers.

Advantages and disadvantages of non-solicitation clause in employment contracts

As discussed earlier, non-solicitation clauses are much needed in today’s time and age. To be clear, these are the most important advantages of a non-solicitation clause in an employment contract.

  • It protects the relationship that the employer has with the employees, customers, or clients.
  • In a competitive world, this clause gives an edge to the employer by preventing other employees from joining other companies that compete.
  • It also helps in preserving confidential information from being leaked by terminated employees.
  • It gives clarity regarding what the former employees can or can’t do when they are terminated.
  • It brings about stability as well as enhances the smooth functioning of the company even after the termination.

Some of the disadvantages of the non-solicitation clause that can be argued are:

  • The non-solicitation clause indirectly restricts the freedom of the employee to continue to choose to carry on the business that he wants to. It puts restrictions on the former employee’s ability to pursue job opportunities.
  • These restrictions, in the bigger picture, will have an impact on competition and innovation.
  • Non-solicitation clauses without any valid reasons create much greater problems to the extent that they may affect hiring new employees for the company.
  • At the end of the day, the non-solicitation clause will not hold up if the employees choose to leave the company at their own will.

Enforceability of employment contracts

When it comes to the enforceability of a non-solicitation clause, it differs across the globe and is subject to the specific laws and regulations of each state. However, universally speaking, there are some common grounds for the enforceability of such agreements, one of which is to see if such clauses are reasonable. The reason for placing such a clause must be clear, and if there are no sufficient reasons behind it, then such a clause will be invalid. Another one would be that it must protect legitimate business interests, i.e., relationships between clients, customers, and employees. However, in India, we see that courts tend to lean towards the employee side, as these types of agreements are considered to be restrictive in nature. Section 27 of the Indian Contract Act, 1872, makes its position clear by saying that agreements that are in restraint of trade, occupation, or profession are void. Courts have held the opinion that these agreements will be valid up to the date of employment but will lose their validity once the employee is terminated, i.e., once the worker is no longer an employee of the company, they cannot put restrictions on his employment opportunities for the future. Non-solicitation agreements are accepted in India; however, each one’s enforceability varies according to the particulars of each case. In Niranjan Shankar Golikari vs. Century Spinning and Manufacturing Co. Ltd. (1967), the Supreme Court laid down a certain foundation for understanding how the courts may assess the scope of non-solicitation clauses. The Court held that such clauses must be reasonable in scope and duration and must not be used to prevent a former employee from pursuing their livelihood.

The Court found that the non-solicitation clause in the case at hand was unreasonable because it was overly broad and would have prevented the former employee from working in his field of expertise. The Court also found that the clause was for an unreasonable duration, as it would have prevented the former employee from working for a period of two years.

The Court’s decision in Niranjan Shankar Golikari vs. Century Spinning and Manufacturing Co. Ltd. provides important guidance for employers and employees on the enforceability of non-solicitation clauses. Employers should carefully review their non-solicitation clauses to ensure that they are reasonable in scope and duration. Employees should be aware of their rights under non-solicitation clauses and should not hesitate to challenge unreasonable clauses.

In addition to the factors considered by the Supreme Court in Niranjan Shankar Golikari vs. Century Spinning and Manufacturing Co. Ltd., courts may also consider the following factors when assessing the scope of a non-solicitation clause:

  • The nature of the business and the relationship between the employer and employee.
  • The geographic area covered by the clause.
  • The duration of the clause.
  • The reasonableness of the clause in light of the employee’s position and responsibilities.

If a non-solicitation clause is found to be unreasonable, it may be unenforceable. This means that the former employee may be free to solicit the employer’s customers or employees.

Non-solicitation clauses can be a valuable tool for employers to protect their confidential information and customer relationships. However, it is important to ensure that such clauses are reasonable in scope and duration. By carefully drafting non-solicitation clauses, employers can protect their interests without unduly restricting the rights of their employees.

Further in the U.K., Mason and Another vs. Provident Clothing and Supply Co. Ltd. (1913) held that the purpose of a non-solicitation clause is only up to the extent of providing adequate protection to employers legitimate business interests. The United Kingdom House of Lords found that the clause in question was unreasonable and therefore unenforceable because it was too broad and would prevent the employee from pursuing his livelihood. The court stated that the clause should only be upheld if it is necessary to protect the employer’s legitimate business interests and that it should not be used to prevent the employee from competing with the employer after the termination of his employment.

The Court’s decision in Mason and Another vs. Provident Clothing and Supply Co. Ltd. is significant because it provides guidance on the enforceability of non-solicitation clauses in the U.K. The decision makes it clear that such clauses must be reasonable and narrowly tailored to protect the employer’s legitimate business interests. This decision is helpful for employers and employees alike, as it provides clarity on the scope of non-solicitation clauses and helps to prevent disputes from arising. Indian employment laws and judicial interpretations are evolving day by day, and these will have an impact on the enforceability of these agreements as well.

Conclusion

Non-solicitation clauses in an employment contract are designed to protect the company from unfair competition and the loss of confidential information. These clauses typically prohibit an employee from soliciting the company’s customers, clients, or employees for a certain period of time after termination of employment.

There are a number of benefits to having a non-solicitation clause in an employment contract. First, it can help to protect the company’s goodwill and reputation. When an employee leaves a company, they may be tempted to take their customers or clients with them. A non-solicitation clause can help to prevent this by prohibiting the employee from soliciting the company’s customers or clients for a certain period of time.

Second, a non-solicitation clause can help to protect the company’s confidential information. When an employee leaves a company, they may have access to confidential information that could be used to compete with the company. A non-solicitation clause can help to prevent this by prohibiting the employee from using or disclosing the company’s confidential information for a certain period of time.

It is important to note that non-solicitation clauses are not enforceable in all cases. In order for a non-solicitation clause to be enforceable, it must be reasonable in scope and duration. For example, a non-solicitation clause that prohibits an employee from soliciting the company’s customers for a period of one year would be considered reasonable. However, a non-solicitation clause that prohibits an employee from soliciting the company’s customers for a period of ten years would be considered unreasonable.

References

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