What is a non-solicitation or “no-poach” clause?
A non-solicitation clause, also referred to as “no-poach” clause, is a contractual arrangement which limits the hiring and poaching of employees of a business. The effect of the non-solicitation clauses is similar to non-compete clauses, which typically aim to limit competition for customers. The non-solicitation clause limits the competition between the parties with respect to the hiring of employees. It can be agreed as a “no-hiring” obligation which prohibits the hiring of employees of the counterparty or as the less restrictive “no-cold calls” obligation which prohibits unsolicited communications addressed to the counterparty’s employees. In many cases the parties under commercial contracts combine the “no-hiring” and “no-cold calls” obligations.
What is the purpose of non-solicitation clauses in commercial contracts?
Commercial relations often put in contact the employees of one party with those of the other party. In some cases even the employees of both parties may work continuously in one team (e.g. in outsourcing, co-sourcing and outstaffing). Such interactions create the need of protection of the employees from potential solicitation by the counterparty to hire them. In industries which lack enough high-skilled professionals or require stricter protection of trade secrets and know-how non-solicitation clauses may be applied in an even broader context. For instance, the contracts between companies in the technology, healthcare and sports sectors most often contain non-solicitation clauses due to the shortage of experts and the increasing costs for hiring and salaries in these industries.
Are there any legal restrictions on the use of non-solicitation clauses under Bulgarian employment law?
Non-solicitation obligations undertaken in commercial relations between employers are not specifically regulated under the Bulgarian employment law.
The Bulgarian Labour Code regulates only the employee-employer relation and allows the employer to restrict the employees from working for another employer for the duration of their employment. However, any post-termination restrictions are invalid according to the settled case law of the Bulgarian courts. Even if the employer offers compensation for the employee during the post-termination non-compete period, such restrictions are invalid as contradicting to the freedom to choose occupation and right to engage in work which is guaranteed under the Bulgarian Constitution Act (Art. 48, para. 3) as well as the Charter of Fundamental Human Rights of the European Union (Art. 15).
Non-solicitation clauses between employers might be viewed as indirectly limiting the employees’ right to choose occupation and to be employed, especially if such restrictions are broad, long lasting and are agreed between a large part of the employers or the largest employers in a particular industry or market. However, such potential indirect impact on the employees’ career aspirations does not fall within the restrictions ensuring employees’ freedoms and human rights. Employees may benefit indirectly only from the restrictions applicable to non-solicitation clauses under the competition protection laws.
What are the limitations on the use of non-solicitation clauses between competitors under the Bulgarian competition law?
From competition law perspective, non-solicitation clauses are permitted within a limited period of time in the context of a transfer of undertaking (e.g. mergers, acquisitions, transfers of business). In the case of a transfer of undertaking, non-solicitation and non-compete clauses agreed within certain limits are considered necessary for ensuring that the buyer will obtain full benefit of the acquired business.
Outside this context, non-solicitation clauses in commercial contracts may restrict competition between the employers on the market of supply of workforce, as an essential supply source. Possible effects of such a restriction is to limit the expansion of competitors. The restriction of labour mobility may lead also to lower productivity and, eventually, higher prices which can be harmful to consumer welfare. In rare cases, non-solicitation arrangements may be beneficial to the consumers, if the employer benefiting from such arrangements passes on this benefit to the consumers (e.g. via lower prices).
The Bulgarian competition authority and the European Commission have not yet investigated the anti-competitive effects of employee non-solicitation agreements between competitors outside the context of transfers of undertakings. However, several competition authorities in other EU-Member States have already resolved on cases involving non-solicitation arrangements. Due to the increasing importance of the issue, the Portuguese competition authority has also a published an Issues Paper on this topic entitled “Labour Market Agreements and Competition Policy”.
It may not be excluded that European Commission and the local regulators will put into scrutiny non-solicitation arrangements limiting the competition on certain markets as one of the measures to promote innovation and economic recovery. Since the sanctions for companies involved in anti-competitive behaviour include not only invalidity of the anti-competitive arrangements but also fines which may reach up to 10% of the companies‘ turnover for the last financial year, companies should prepare in advance for any increased scrutiny by the regulators.
Existing non-solicitation arrangements should be reviewed from competition law perspective and the assessment of the effects of any new ones should always be made in consideration of the effects on competition. The scope and duration, as well as the existence of underlying business relations which create the need for protection of employees are the most important aspects of the non-solicitation arrangement to be considered in each case.
The competition law risks can be mitigated by a combination of the following terms:
- choosing a less restrictive wording of the non-solicitation clause (e.g. as a “no-cold calls” obligation instead of “no-hiring”),
- setting a reasonable effective period and
- limitation of the employees to which it applies (e.g. employees connected with the performance of the commercial contract instead of all employees).
For further information contact:
Iva Georgieva, Senior Associate