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Restricting Employee Competition with Former Employers

November 09, 2014

Non-competition and non-solicitation clauses in employment contracts (collectively referred to as “restrictive covenants”) can be a source of frustration and uncertainty for employers and employees alike.

As a general rule, courts in Canada are reluctant to enforce employment contract clauses restricting the employee’s ability to compete with the employer. The overarching reason for this is the fundamental principle that everyone has the right to earn a living. Depending on an employee’s role and the nature of the restriction in question, there are cases in which an employment contract clause which restricts the employee’s ability to compete with the employer after the two part ways may be upheld.

The following are some of the key issues to consider when thinking about restrictive covenants.

Non-Competition Clauses

Imagine that an employee signs a written employment contract before starting work with a new employer. Imagine further that, in this contract, the employee promises not to compete with the employer for a period of time after the two part ways in the future. Despite having this in “black and white,” the employer will not, generally speaking, be able to hold the employee to her promise.

Although it is theoretically possible that such a non-competition clause may be enforced in rare circumstances where the court finds that the restriction is reasonable in its duration, geographic scope and nature, as a practical matter, it is exceedingly difficult to draft such a finely-tuned clause. This difficulty is exacerbated by the fact that the analysis with respect to the reasonableness of a restrictive covenant is highly fact-specific. As a result, employers are not generally able to draft a clause that is strong enough to protect their interests without “going too far.”

Non-Solicitation Clauses

In contrast to a non-competition clause, a typical non-solicitation provision only requires that a former employee not solicit the former employer’s customers or clients for a specified period of time. Non-solicitation is therefore, by definition, much narrower than non-competition, which makes it relatively easier to draft a non-solicitation clause that protects the employer’s legitimate interests without unreasonably restricting the employee’s right to earn a living.

As is the case for non-competition clauses, non-solicitation provisions need to be reasonable in scope and duration in order to be enforceable. Unlike non-competition clauses, however, non-solicitation clauses are more likely to be upheld by the courts, provided that they are reasonable and necessary in order to protect a legitimate interest of the employer. Such non-solicitation provisions are commonly used in settings where an employee’s position puts her in contact with or gives her access to an employer’s customer contacts or other proprietary information. Non-solicitation clauses are similarly used in connection with executive employees.

Therefore, when drafted carefully and reasonably and when properly used, non-solicitation clauses can be an important tool for employers seeking to protect key interests. Conversely, such clauses can impact employees in significant ways, making it important that employees understand their obligations at all stages of the employer-employee relationship.

Overbroad and Unreasonable Restrictive Covenants

The importance of carefully considering the language and scope of restrictive covenants is underscored by the general approach to enforceability taken by Canadian courts.

If a court determines that a given restrictive covenant is unenforceable (e.g. due to being overbroad or otherwise unreasonable) it will not reinterpret or rewrite the parties’ agreement in order to bring it into compliance with the law. In other words, courts will not generally “read down” a restrictive covenant that is found to be unenforceable as drafted. Instead, the entire clause would typically be found to be void and thus unenforceable.

In rare cases, where the problematic portions of the restrictive clause are clearly trivial and do not concern the main purpose of the restrictive covenant, the court may decide to strike such portions out and read the remainder of the clause as if it did not contain the problematic language. This is of little assistance, however, since the Supreme Court of Canada has made clear that this remedy is to be used sparingly and that, in general, a restrictive covenant that is found to be unreasonable will be void and unenforceable.

Fiduciary Duties

In conclusion, it would be appropriate to briefly mention fiduciary duties which could well be the subject of a separate discussion in the future, but are nevertheless related to the subject of restrictive covenants.

Fiduciary duties may arise and exist apart from any contractual arrangement between an employer and an employee. They include, among many others, a duty of loyalty, and a duty not to prefer one’s own interests over those of one’s employer. Such fiduciary duties are sometimes incumbent upon senior employees in executive positions. Because of their potentially significant implications with respect to competition and solicitation and their non-contractual nature, these are matters that should be carefully considered by employers and employees alike.

Tags: Employment