We are frequently asked by our clients to review non-compete and non-solicitation provisions. Clients sometimes get the two types of clauses confused and ask us:
A non-compete clause (commonly referred to as a “covenant not to compete”) is defined by state contract law and refers to situations where one party to the contract (usually an employee or independent contractor) agrees to not enter into or start a similar profession or offer the same or similar services in competition against another party (usually the employer).
Courts have upheld non-compete clauses, so long as the clause contains reasonable limitations as to the geographical area, the type of work that’s considered “competitive,” and the time period, during which one party may not compete. In Georgia, the geographical area is generally limited to about a 10 mile radius around the business/employer/company during the term of the contract (with the employee or independent contractor), and for a period of time following termination of that contract. O.C.G.A. § 13-8-53, Georgia’s restrictive covenant statute, also provides that the activities, products, or services defined as “competitive” may include any activities, products, or services “of the type conducted, authorized, offered, or provided [by the employee] within two years prior to termination”. According to O.C.G.A. § 13-8-53(c)(1), typically, 2 years or less is considered a reasonable time to restrict an employee from competing after they leave the company.
The courts generally uphold more stringent non-compete agreements for business partners and business sales. Specifically, Georgia law provides that company owners may be restricted from competing for five years following termination of employment and/or their leaving the business as an owner (these types of non-competes are often found in employment agreements for owners/business partners or contracts to purchase an entire business).
Non-solicitation clauses are used to prevent poaching of customers or inducing other employees to leave their employer to work for a competitor, after the termination of the contract (usually, when employment is terminated). Generally, courts will uphold a non-solicitation provision that limits an employee from soliciting or attempting to solicit business from customers (including prospective customers) with whom the employee had material contact during his or her employment, in accordance with Georgia law, O.C.G.A. § 13-8-53(a)(4). Similar to non-competes, a 2 year post termination non-solicitation agreement is usually upheld as “reasonable” for regular employees.
In contrast to non-competes, non-solicitation clauses are not required to contain a geographic area or apply to only particular types of products or services. Additionally, non-solicitation provisions do not restrict a former employee from working for a competitor, in the way that a non-compete would. For example, a former employee who agreed to a customer non-solicitation provision could go to work for a competitor or start their own competing business so long as the employee does not attempt to solicit customers of their former employer, that the employee had contact with during the time of their former employment, and/or their fellow (ex) employee colleagues that are still at the prior employer.
Another important distinction between non-compete and non-solicitation clauses is important for independent contractor (IC) agreements. Non-competes are “per se” unreasonable in IC agreements. Furthermore, if a business were to include a non-compete provision in its independent contractor agreement, it may be a red flag for the Department of Labor (DOL) or the Internal Revenue Service (IRS), in that those agencies could consider the contractor to be a misclassified employee (rather than an IC). As a result, the reclassified employee would fall under the various labor regulations and statutes related to employees. Businesses, especially startups, often want to tie up their ICs with non-competes, however, those businesses must be aware of the heavy handed risk in attempting to bind their ICs in such a way.
At Sparks Law, we’ve represented both companies that seek to write strong employment contracts with non-competes and non-solicitation provisions, and also represent employees that are trying to get out of contracts with these terms. We’d be happy to help – feel free to get in touch with us today!
