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Logistics and transportation companies are service-based organizations that typically have multiple sales teams. As such, the majority of companies in the logistics space may require their staff to sign employment agreements at the beginning of their tenure. This is often done to prevent brokers from working for other logistics companies or deferring any pre-existing business, but when does it go too far?
Most agent-based programs do not require non-competes or non-solicits for their 1099 agent contractors. In contrast, most W2 employee positions require an employment agreement that may include non-compete and non-solicit provisions. This blog post outlines the restrictions and the similarities and differences between both.
What Is a Non-Compete Agreement?
What is a non-compete?
A non-compete agreement prohibits employees from competing with their employer after the working relationship ends. While contracts vary from company to company, a non-compete agreement means that post-termination, the employee cannot:
- Work for a competitor (company or individual) in the same market
- Start a business offering the same products or services
- Develop competing products or services
Non-compete agreements can also prevent former employees from revealing secrets or sensitive proprietary information about operations, strategy, customers, processes, pricing, future ideas, or any other intellectual property obtained on the job after the separation.
You may have seen in the news recently that TQL, the second largest freight brokerage in the U.S., is being sued by a former employee over its non-compete agreement. Jacob Patterson, who worked at TQL for nearly 14 years, argues that his lawsuit "demonstrates the extraordinary measures TQL will take to harm the career prospects of an employee who has the temerity to leave the company."
There are particular rules that make non-compete agreements enforceable, and they vary from state to state. Many jurisdictions require that non-compete agreements be specific, necessary, and realistic. Non-compete agreements are often restrictive in terms of market, geographical locations, and length of time.
The time frame for a non-compete agreement varies greatly, often ranging from six months to five years, depending on the location, industry, and company. However, they can sometimes last longer.
Before you sign a non-compete, take the time to read the fine print and understand the depth and breadth of the agreement. If you are unsure, contact your own attorney to review the document on your behalf. Many companies will require these documents to be completed before becoming an employee. It's imperative to understand what you agree to and how it can affect your ability to earn a living wage in the future.
When and why are non-competes used?
Businesses use non-compete agreements to maintain their competitive advantage and prevent important proprietary information from spreading to competitors. If ex-employees were free to use this information to help a competitor or to start their own business, the company could be forced out of the market or industry.
Non-compete agreements are often used in several situations:
- Client-based industries: Industries requiring employees to build their own customer lists often require non-compete agreements, including sales and service professionals. This prevents an employee from going to another company and becoming a direct competitor while leveraging skills or client lists gathered at the first company.
When businesses are sold: If you're buying a company, you may want to have the seller sign a non-compete agreement to protect your investment. Agreements like these are typically for a set area and restrict the seller from establishing a competing operation. For example, you wouldn't want to buy a clothing store if the former owner planned to immediately open another clothing store across town selling the same items. Business-to-business sales can create similar restrictions. - Where highly confidential information is at stake: When employees are exposed to highly secretive proprietary information, such as a special product recipe or highly complex tech algorithm, it may be beneficial to have them sign a non-compete agreement. Otherwise, they could use that knowledge to replicate the product or develop a competing product for a competitor.
As a brokerage or agency owner, you may consider using a non-compete agreement with your staff members to protect your business. When doing so, consult with an attorney to ensure that your contract is fair and legally binding in the state in which you reside. Agreements that are overly broad and overly long will typically be much more difficult to enforce. For example, a six-month non-compete for Jacksonville, FL may be more readily enforced by a judge than a five-year agreement covering the entire United States.
What Is a Non-Solicit Agreement?
What is a non-solicit?
A non-solicit agreement is a contract between an employer and employee stating that the employee cannot solicit any of the employer's clients and/or personnel after the working relationship ends. In other words, the departing employee cannot take customers to a new organization or encourage current employees to leave.
Like non-competes, non-solicit agreements often cover a particular time frame and geographic area. A non-solicit agreement or clause may be part of a larger document, such as an employment contract, a non-compete, or a non-disclosure agreement, or it can be its own standalone document.
Because there's no specific definition of solicitation on a federal level, the exact meaning can vary from one agreement to another. This can make it difficult for companies to prove violations of non-solicit agreements.
When and why are non-solicits used?
The motivation behind a brand wanting to protect its customers is obvious. When a customer goes from your organization to your competitor's, not only have you lost money, but your competitor has gained revenue in the process. Losing several customers can mean the difference between staying in business and being pushed out. Companies use non-solicit agreements to protect both their revenue and market share.
Non-solicit agreements aren't just for safeguarding clients. Companies use them to protect their most important resource, their talent. From the time it takes to recruit and train to the money it takes to pay and develop an employee, companies invest many resources in hiring and retaining personnel. Non-solicit agreements protect this investment.
Similar to a non-compete, companies can require non-solicit agreements for any position in any industry. That said, they are most often used in highly competitive industries, such as medical, pharmaceutical, banking, logistics, and technology, and in positions that are difficult to recruit for. Salespeople are frequently required to sign non-solicit agreements to prevent the loss of clients.
An employee may be asked to sign a non-solicit agreement at any stage of employment. Non-solicits are most frequently required at the beginning of the working relationship. In some cases, when a separation or severance agreement is offered to a departing employee, they may be asked to sign a non-solicit or non-compete document at that time. Evaluate any document and understand what you are agreeing to before you sign it. Once you have executed a document like this, it should be considered legally binding and adhered to.
What's the Difference Between Non-Solicit and Non-Compete Agreements?
Non-compete and non-solicit agreements are often considered the same, but there are important differences. While both documents seek to prevent former employees from "taking" clients, non-compete agreements are far more restrictive. A non-solicit agreement prevents an employee from luring existing clients and personnel away from the company but still permits them to work in the same industry and continue taking inbound clients. A non-compete agreement bans an employee from the industry altogether.
Some companies, such as Steam Logistics, propose eliminating non-compete agreements in the freight industry altogether. They argue that non-competes "exploit the talents of our workforce, obstruct healthy competition and severely limit what's possible in our industry."
According to Burke, Warren, MacKay & Serritella, P.C., courts have generally viewed non-solicitation agreements more favorably as they do not impose limitations on an employee's right to work. When balanced against the company's legitimate interests — to preserve and protect its client base — non-compete agreements have been found to restrict an employee's ability to seek other employment greatly. Non-solicitation agreements, on the other hand, are generally viewed by the courts as imposing reasonable conditions as the employee is free to continue working in their area of expertise.
Looking to Run Your Own Business? Consider Becoming an Armstrong Agent.
It's important to do your due diligence during the vetting process and ensure the contract you sign is a good fit for your business. Having an attorney review your agreement and outline any potential stipulations you may not be aware of may be worthwhile. (For more information on getting an agency started, you can also visit our blogs on Should I Become a Freight Agent? and the 5 Best Freight Agent Programs for Experienced Logistics Professionals.)
For an agency partner experience that's second-to-none, consider working with Armstrong. We offer innovative technology solutions customizable to your needs, premium back-office support, and industry-leading commission splits. Get in touch with us today and let us know how we can support you.