Mutual non-solicitation clauses

Talent is often a company’s most valuable resource. It’s no surprise, then, that businesses look to safeguard their investments by preventing the poaching of their employees through mutual non-solicitation clauses. However, such well-intended arrangements can quickly shift from collaboration into the murky waters of anti-competitive conduct.

Why mutual non-solicitation clauses matter

These clauses typically involve two or more businesses agreeing not to recruit or solicit each other’s employees. At face value, these clauses might appear to protect business interests, reduce turnover, and maintain stability. Yet, beneath this surface lies a potential breach of competition laws, with consequences far outweighing any perceived benefits.

The competition law perspective

Competition authorities globally—including South Africa’s Competition Commission, the US Department of Justice, and the European Commission—are increasingly viewing mutual non-solicitation clauses as potentially harmful. Why?

• Reduced employee mobility: These clauses curtail employees’ freedom to move between companies, limiting their career opportunities and professional growth.
• Wage suppression: By removing the competition for talent, businesses inadvertently suppress wages and limit incentives to improve employee conditions, directly harming workers.
• Cartel-like behaviour: Regulators often classify broad non-solicitation clauses between competing companies as a form of cartel conduct, similar in nature to price-fixing or market division.

The consequences of crossing the line

Companies found violating competition laws through overly broad or unjustified non-solicitation clauses risk substantial fines, legal injunctions, and severe reputational damage. Regulators are becoming increasingly vigilant and have been known to pursue criminal actions against companies engaging in restrictive employment practices.

Mitigating the risk

To navigate safely, businesses must ensure that any mutual non-solicitation clauses are:

• Narrowly tailored: Limit the scope strictly to necessary protections, clearly defining the employees and roles involved.
• Time-bound: Keep duration reasonably short to mitigate restrictive effects.
• Clearly justified: Ensure legitimate business reasons such as safeguarding confidential information or significant investments in employee training.

Takeaway

While protecting your business’s investment in talent is essential, it’s crucial to tread carefully. Balancing legitimate business interests with fair competition practices not only ensures compliance but promotes a healthier, more innovative market for everyone.

For expert guidance on drafting compliant mutual non-solicitation clauses, reach out to ITLawCo—we’re here to help you protect your business the right way.