If I agree to this for every client, will I be out of business?
Finally, we wrap up our first accidental series (surely, there will be more) on restrictive covenants.
As a quick reminder, a restrictive covenant is a condition that restricts, limits, prohibits, or prevents the actions of someone named in an enforceable agreement.
Previously, we covered:
Non-Disclosure which prohibits you from (i) disclosing your client's confidential information to third parties or (ii) using your client's confidential information for any purpose other than providing services to the client. Find the discussion here.
Non-Compete, which prohibits you from providing services (i) to competitors of your client or (ii) that compete with your client. Find the discussion here.
This month, non-solicitation gets our attention. Non-solicitation restrictions come in two flavors:
A restrictive covenant that prevents you from trying to hire away your client's employees.
A restrictive covenant that applies when you are a subcontractor. It prevents you from bypassing your client to solicit business directly from the end client.
Let’s look at each in turn.
EMPLOYEE NON-SOLICITATION
Sample provision:
Although less restrictive than a non-compete, I dislike these as they treat employees as if they are the client's property, like confidential information. I do believe that employees are assets, but they are not property (yes, there’s a difference). And NDAs cover the confidential information that the employee may have.
That said, many clients will insist on this restriction. In that case, my go-to’s are:
Carve out employees who respond to general job announcements or approach you on their own.
Limit restrictions to employees that you meet through your work on the engagement.
Limit the time period.
Make it mutual.
If your industry or community is small, agreeing to non-solicitation of all of the employees of all of your clients will make it very difficult, if not impossible, to recruit talent!
Sample revisions:
CLIENT NON-SOLICITATION
Sample provision:
Your client would be justifiably upset if you poach an end client, not to mention the hit to your reputation. However, there must be limits to a non-solicitation. Make sure the non-solicitation of end clients is limited to end clients that you actually provide services for. It should not be so broad as to effectively become a non-compete.
Always try to carve out end clients that are already known to you or that approach you on their own. And make sure you can’t get in trouble for unintentional solicitation of a client that you are not aware of being your client's end client, which is common in some industries.
Sample Revisions:
A quick litmus test regarding restrictive covenants. Ask yourself this: “If I agree to this for every client, will I be out of business?”
If the answer is yes (or probably), just say no.
I know that it is very hard to say no to clients. They will even tell you that all of their other service providers agree to these restrictions. That may be true. Just as likely, it is not true. Regardless, you owe it to yourself, to your team, and to your mission to make sure your business thrives.
Key Takeaways from our restrictive covenants series:
Any restriction needs to be as narrow as possible
Make sure standard carveouts are included
Don’t be afraid to stand up for your business
Have questions? Make sure to reach out.