Many creative agencies seek to stanch client and talent turnover by putting non-compete or non-solicit clauses in their employment contracts. The problem with this approach is that non-compete provisions are not enforceable in some jurisdictions and only enforceable in very limited circumstances in others. Also, agency owners and executives often use these two terms and clauses interchangeably, and sometimes don’t have an understanding of what it is they’re asking their team to agree to.
So, before putting a non-compete or non-solicit in your employee contracts, you should think about what actions you’re really trying to prevent, as well as what’s actually enforceable in your state (and the state where the employee works if not the same). Ideally, you should also understand the best use cases for a non-compete vs. a non-solicit and how to write them effectively.
Here are some key considerations to keep in mind when drafting your employee contracts to protect your business, client relationships, and talent pool.
What’s the Difference Between a Non-Compete and a Non-Solicit Clause?
Before digging into the potential use cases, it’s important to understand the differences between a non-solicit and a non-compete.
A non-compete clause is a restriction on your former employees’ ability to go work for a competitor after employment ends. That restriction begins the moment they leave employment (though the obligation is typically there during employment, as well, whether by contract, statute and/or common law “duty of loyalty” requirements), and can last months or even years.
A non-solicitation clause, on the other hand, restricts former employee interactions with their former colleagues and their former employer’s clients, also for some period after their employment ends. Essentially, they prevent former employees from soliciting employees and clients to bring their services and work elsewhere.
Are Your Agency’s Non-Compete Clauses Enforceable?
You’ve worked hard to build your client relationships and your team. The ostensible purpose of including non-compete clauses in employee contracts is to protect these critical relationships. However, in reality, they almost always go further than that and make for bad policy.
Do agency owners really want to prevent their former designers, developers, project managers or other employees from going to work for themselves or another agency after leaving employment? In our experience, more than nine times out of ten, the answer is, “no.”
Moreover, non-compete clauses are completely unenforceable in California, and only enforceable under certain strict conditions in many states. For example, a non-compete in Washington state might be enforceable if it meets all the requirements of this code section. That could mean payment of salary for the post-employment, non-compete period if the employee is let go versus resigning and a requirement that the employee make at least $100,000 annually (adjusted up each year for inflation).
There are other more narrowly-tailored ways to protect your client and employee relationships, which we discuss below.
Use a Client Non-Solicit to Protect Your Client List
While a non-compete has challenges (and may not be the best tool for the job), a client non solicit may be a good alternative.
A client non-solicit clause says that, for a period of time, the former employee may not steal your clients personally or on behalf of another agency. Some states regulate non-solicit clauses similarly to non-compete clauses, so you need to be aware of state requirements in the state where your agency is located and where the employee is located before implementing a client non-solicit.
A typical approach is to prevent former employees from soliciting those clients that they worked with or that they have confidential information about. The restriction period is typically about 12 months. Some states permit broader restrictions, but this is a good place to start.
Client non-solicit clauses can be tough to enforce if the client wants to follow your former employee. To do so could mean having to sue your client. So in addition to the restriction on your employees, be sure to keep doing things as an agency that make your clients want to keep working with you.
A Non-Solicit Clause Can Prevent Employee Poaching
Seeing a talented team member leave for another agency can sting. But seeing that person depart only to take others with them could spell financial trouble for your agency.
Fortunately, employment contracts with a non-solicit clause can protect against that practice. We recommend that an ex-employee be barred from recruiting (soliciting) your other employees for a period of up to 12 months after leaving your agency. A longer period may be enforceable and appropriate in some circumstances.
Note that non-solicit clauses can also be included in your client contracts to prevent clients from hiring away your employees, and we typically recommend that our agency clients use these. A clause like this typically needs a “liquidated damages” provision or “conversion fee” in order to make them worth the paper they’re written on. In our experience, a liquidated damage clause ranges from 50% to 100% of the employee’s annual salary. Usually, these are limited to the period of the relationship between the client and agency and some number of months (often 12) thereafter.
“Trade Secrets” Laws Provide a Layer of Protection
Whether or not you include non-solicit clauses in your employment agreements, your contracts should have language prohibiting employees from using or disclosing your (and your clients’) confidential information. There are a number of very good reasons for this, including preventing former employees from using that information to compete with you after employment. It is somewhat typical (though not strictly necessary) to include certain examples of confidential information; as relevant to this subject, you would certainly want to specify information about clients and employees.
A “trade secret” is a type of heightened confidential information that is given strong protection under law. Even in states like California, where post-employment non-competes like those we’re discussing in this article, are not enforceable at all, a former employee may not use their former employer’s trade secrets (e.g., information about client needs, preferences and fee structures), including to solicit clients or compete.
Give Your Agency Some Extra Cover With the Right Clauses
No agency wants to see its team members or clients leave, especially if it’s to a competitor. As you can glean from above, there’s a lot of nuance in adding provisions to your employment (and client) agreements to try to deal with this. In a forthcoming blog post, we will also discuss somewhat unique ways you might be able to incentivize employees to stick around.
If you would like additional guidance on how these clauses can work best for your agency, please feel free to get in touch.