Tuesday, December 13, 2016

Are Non-Compete and Non-Solicitation Clauses Actually Enforceable?


Employment agreements will often include language that is intended to restrict the actions of employees following the end of their employment. These types of clauses, typically relating to confidentiality, non-solicitation and non-competition, are aptly referred to in the employment law world as restrictive covenants.

Most commonly, many employers will seek some assurance that their once all-star employees do not solicit business away from the company. In some cases, employers may even be concerned about former employees leaving a company and going on to compete against it in the same market.

The interests of employers in protecting their businesses must of course be balanced against the rights of employees to pursue their trade of preference

Given their competing interests, it is not all that surprising that restrictive covenants are often controversial and subject to challenge before the Courts.

In determining whether such terms should be enforceable, the Court will not only give weight to the parties’ respective interests, but will also consider the context in which the restrictive covenants were agreed to. While the Court will look to give effect to the parties’ freedom to contract with one another, it will also consider the power dynamics of the parties in negotiations of terms of employment.

The legal test developed by the Supreme Court of Canada in view of these varying interests is as follows:
  1. Does the employer have a proprietary interest entitled to protection? In other words, an employer must have a legitimate reason for seeking to restrict a former employee from having contact with clients, soliciting business or otherwise competing.  Common proprietary interests often include protecting trade secrets, confidential information and trade connections. As an example, it would likely be unreasonable for an employer to include a non-competition clause for its junior administrative support staff, unless of course it had legitimate reasons for doing so.
2.     Are the temporal and geographic elements of the agreement too broad? What this means in plain English is that the restrictive clause cannot be unnecessarily broad. In order to assess this, the Court will consider whether the geographic and time restrictions imposed are reasonable, having regard to a number of factors including: the nature of the industry; the type of relationship between the parties; and the position of the departing employee including the level of trust and confidence he or she enjoyed. While it may for instance be reasonable to limit a senior financial adviser from soliciting the clients that he or she worked with while at the company for a one-year period, it would in all likelihood be unreasonable to impose an indefinite restriction for a junior level bookkeeper to have contact with any of the company’s clients, past, present and future;

3.     Is the covenant unenforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employee? In other words, did the employer really need a non-compete clause to serve its interests or would a non-solicitation clause have sufficed? As a general principle, non-competition clauses are generally frowned upon in the employment context, though it may have some greater enforceability in circumstances involving the sale of business. That is, preventing an employee from competing in some form or capacity with the employer is not generally practical. However where one party sells its business to another, it would make sense to have some limitations in place to bar the seller from opening shop down the street.

The question of whether a restrictive covenant is reasonable, and accordingly enforceable, must be viewed in context of the employment circumstances overall. What is the nature of the industry? How were the terms of employment negotiated and agreed to? Did the employee bring his or her own clients to the company? Did he or she develop clientele from the Company’s contacts, and/or using its resources? Are clients likely to leave with the employee? Is he or she in a position of trust and confidence? 

Given the nuances involved, it Is highly recommended that you consult with a lawyer, whether you may be subject to a restrictive covenant or seeking to enforce such a clause.

- Simran Bakshi, Associate Lawyer Toronto

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