Restraints of trade in the employment context 03: Understanding non-solicit clauses

In our first article, we outlined the two main types of restraint clauses:

• non-solicitation; and
• non-compete.

The second article in this series explored non-compete clauses. This article will go into further depth on the second type – non-solicit or non-dealing clauses.

What is a non-solicitation clause?

Like all restraints of trade that have developed through the common law, a non-solicit clause is concerned with protecting a business’ proprietary interests in the event of a former employee setting up or joining a competing business. Provided they are reasonable in scope, a non-solicit clause may include prohibitions on:

• approaching former colleagues to entice them away from their employment (that is, “poaching” employees);
• approaching clients of a former employer with the intention to entice them to use their services instead; and
• approaching suppliers to provide their goods or services to them instead.

A non-solicitation clause recognises that relationships with clients and suppliers often take significant time and investment to build, and they are important assets for a business. Employees will often develop strong relationships with clients or suppliers during the course of their employment. This is especially so where an employee has regular contact with clients or suppliers and if building that relationship is an expectation or important part of their role. This is most relevant for senior employees who may be seen as the “face” of the business.

Staff connections are also important to businesses, as they often invest significantly in training an employee to build their skill base and industry knowledge.

What is solicitation in an employment context?

As mentioned previously, restraints in the employment context must not go any further than what is reasonably necessary to protect a business interest. For this reason, non-solicitation clauses do not prevent any contact with former colleagues or business contacts dealt with through the course of employment. Rather, they must seek to capture circumstances where a former employee is in contact with these connections to either directly or indirectly entice them to transfer business away from the employer and to the former employee's new enterprise.

There has also been judicial consideration of whether solicitation can occur when ex-employee of a business is contacted first by a current employee, client or supplier of the business. In Barrett & Ors v Ecco Personnel Pty Ltd [1998] NSWSC 545, the former employee, Mr Barrett, contended that he had not solicited a client, as it was the client who had provided the "window of opportunity" when it approached him first seeking a business proposal. Mr Barrett provided a presentation to the client on this proposal and was ultimately successful in obtaining their work. In that case, the Supreme Court found that Mr Barrett's interpretation of "solicit" was too narrow and upon taking up the invitation to make a proposal to the client, Mr Barrett had breached his restraint.

Common non-solicit clause pitfalls

Like any restraint of trade, non-solicitation clauses must be used with caution and drafted carefully to ensure they stand up to scrutiny if ever challenged by the courts. Remember, any restraint that goes beyond what is reasonably necessary to protect a legitimate business interest will be held unenforceable. Below, we identify some of the common grounds for non-solicit clauses to fall down.

Too much for too long

Similar to non-compete clauses, one of the most common ways in which a non-solicitation clause will be held unenforceable will be when it restricts too many activities for too long or over a too great geographical location.

The case law is littered with such clauses, however a recent example is Label Manufacturers Australia Pty Ltd v Chatzopoulos [2022] NSWC 1059. In this case, the employer had drafted a restraint which prohibited the employee to "solicit or attempt to solicit any Business Contact, where such solicitation in any way relates to products and/or services provided by the Company".

His Honour opined that while it was "conceivable that the obtaining of supply of particular goods or services for a business could involve some sort of confidential know-how (which there was no suggestion of in this case) it is hard to see how a blanket ban on dealing with LMA’s suppliers and service providers could ever be justified as reasonable." His Honour drew the example of Mr Chatzopoulos being prevented from buying paper clips from the same supplier as his former employer.

Similarly, In Reeves v Koops Martin Financial Services, Mr Reeves resigned from his employer (Koops) to accept a position with a competing company. Following his move, he began to provide services to several clients with whom he had worked with at Koops. Mr Reeves was subject to a restraint which prohibited him from soliciting, enticing or accepting instructions from any client of Koops for a 12-month period following termination of his employment. The restraint was limited to the city of his employment, Coffs Harbour. The Court found part of the restraint to be reasonable, in prohibiting the acceptance of instructions and solicitation of customers who were serviced by Mr Reeves. The Court considered that the geographical area limited to Coffs Harbour was "not at all excessive" and the 12 months was "no more than reasonable to allow Mr Reeves replacement an opportunity to establish a rapport with and demonstrate his or her competence to clients, and thus a reasonable time for operation of the restraint". The Court did however consider that the restraint prohibiting solicitation or accepting instructions from customers who were not serviced by Mr Reeves was excessive.

A one clause fits all approach

We often see employment contracts for entry level and executive employees with the same set of non-solicit clauses inserted. This approach fails to take into account the vastly different roles these two employees may play in a business. For example, a senior executive is often the face of the business to clients and suppliers and is privy to much more sensitive confidential information. In this circumstance, a more restrictive non-solicit clause is more likely to be to be found reasonable than if it applied to the entry level employee who does not have such contact. For this reason, employers should tailor their contracts to match the seniority and duties of the employees it wishes to restrain.

Is my restraint reasonable?

While what is reasonable will vary in the circumstances, there are several cases which provide guidance as to the parameters of non-solicitation clauses which should be considered when drafting contracts.

The factors which determine reasonableness are the same as those outlined in our second article.

Change in the wind?

While the test of whether a restraint is enforceable has been the subject of substantial judicial consideration, the Commonwealth Government has identified it as an area of potential reform in its ambition to remove roadblocks to productivity and improve wage growth.

Earlier this month, the Government tasked the ACCC and Treasury to consider the competitive impacts of non-compete clauses in the Australian economy and to provide advice on what action (if any) they should take in addressing this. It remains to be seen what may come of this, so for now it is a case of watch this space.