Restrictive Covenants: Understanding Enforceability and Liability

Employers often include in employment contracts what are referred to as 'restrictive covenants.' This term is generally used to describe two main types of contractual clause: 1) the non-solicitation clause and; 2) the non-competition clause.

If you have signed, or been presented with, an employment contract that has a restrictive covenant it is important to understand what it means and what potential liability you could face if your employer sought its enforcement against you.

The Non-Solicitation Clause

A non-solicitation clause is used to prevent an employee from soliciting (i.e. trying to acquire) clients of their employer, or alternatively, from soliciting other employees of the employer to leave their current employment.

An example of a simple non-solicitation clause could read like this:

During the term of this Agreement and for twelve (12) months following its termination, the Employee will not, without the prior written consent of ACME, either directly or indirectly, on the Employee's own behalf or in the service or on behalf of others, solicit or attempt to solicit, divert or hire away any person employed by ACME or any customer of ACME.

The Non-Competition Clause

A non-competition clause seeks to prevent an employee from competing with the employer's business. They are often more difficult to enforce than non-solicitation clauses.

An example of a simple non-competition clause could read like this:

The Employee shall not, either during his or her employment or for a period of two (2) years following the termination of his or her employment for any reason including resignation, carry on, or be engaged in, or employed by, any person engaged in a business which is the same as, or substantially similar to, or in competition with, ACME's business at the time of any such termination within a radius of eighty (80) kilometres of the City of Ottawa.

What Employees Need to Know About Restrictive Covenants

Both non-solicitation and non-competition clauses seek to protect the employer's legitimate business interests. While a court, in the right circumstances, will enforce a non-solicitation or a non-competition clause, two requirements must first be met:

  1. The least intrusive means by which to protect the interest must be used; and
  2. The clause must be clear and reasonable in its scope of restriction.

Drafting an enforceable non-solicitation or non-competition clause is no easy feat. Part of the problem for employers is restrictive covenants are a form of trade restraint. In other words, they limit how individuals may act in the economy. As such, for public policy reasons, Courts look at any restrictive covenant with the view that they are to be considered unenforceable until proven reasonable.

Here are some best practices to help you better understand the boundaries of proper restrictive covenants:

Here are some best practices to help you better understand the boundaries of proper restrictive covenants:

Subject Matter Should be limited to existing customers or prospective customers whom the employee has directly engaged in the recent past. Solicitation of company employees should be restricted to those in active employment. Non-competition should only limit the employee from being engaged in similar activities to that of his or her job at the time of dismissal.
Geographic Scope May be quite broad, given the global nature of many modern businesses. Should be limited to a scope that is necessary to protect the company's business interests in light of the former employee's departure. Over-broad clauses, such as being of worldwide scope or, for that matter, failing to define a geographic scope, will prove extremely problematic.
Time Limitation Should be for a limited period of time. Generally, clauses of 6 to 12 months will be acceptable in their length. Should be for a limited period of time. The proper period will depend on the nature of the industry, the employee's role and the potential for harm. Such clauses longer in duration than 12 months may prove problematic. For more senior or executive employees, lengthier time periods may be appropriate.

If you find yourself confronted with a restrictive covenant, or are interested in utilizing them to protect your business, make sure you have proper advice to avoid common mistakes.

Employment and Labour Laws are not always straightforward, but whether you are an employee or an employer, understanding your rights and duties will only stand to benefit you. Reach out to an employment lawyer or labour lawyer today if you have any questions and be sure to get what you deserve and safeguard yourself for the future. The lawyers at Vey Willetts LLP have a proven track record and are happy to assist.  

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