What are Non-Compete Agreements and Are They
Enforceable in an Employment Contract?
During the course of employment, employees are often in positions to acquire in-depth information and knowledge of their employer’s business methods, as well as their clients. Restrictive covenants, which include non-compete, non-solicitation and confidentiality clauses, are typically contained in employment contracts at hiring and require some of the most consideration by employers when drafted.
A non-competition (non-compete) clause is typically used to prohibit an employee from starting a business that is in competition with the employer or accepting work that is competitive to the employer.
In contrast, a confidentiality clause would prohibit an employee from disclosing any confidential information acquired during the course of employment; while a non-solicitation clause would prohibit an employee from soliciting the clients, customers and employees of the employer. Based on the clause, these provisions can apply during or after the employment period.
These restrictive covenants can form a separate agreement or can be drafted as a clause within a more general contract. Such contractual clauses essentially exist to limit a former employee’s ability to compete with the employer for their same clients in the same area, for a certain period of time.
Enforceability of Non-Compete Clauses
Under Canadian law, courts have generally been reluctant to uphold non-compete clauses, as they can restrict an employee’s ability to earn a living or pursue job opportunities as they wish. Such clauses are generally unenforceable unless the employer can demonstrate a legitimate need for the clause.
Firstly, the employer must demonstrate that there is a proprietary interest to be protected via such a restrictive covenant, and once this is established, the court will consider whether there were less restrictive means of protecting that same interest. In doing so, they consider a number of factors, such as:
· The duration of employment of the employee with the employer
· The amount of contact the employee had with the employer’s clients (i.e. how much service was provided, and was it provided exclusively? How much influence did the employee have over the clients?)
· The amount of confidential information the employee had access to and contact with during their employment
· The vulnerability of the employer to competition and the overall market for their product or service (i.e. is there perhaps opportunity or clientele that has yet to be serviced? How much damage could a competing/soliciting employee do in the same market as the employer?)
· The nature of the employer’s business with respect to the strength of customer loyalty
In addition to these factors, the courts will also consider if enforcing the covenant is within the public interest. Most non-compete clauses are generally considered too restrictive and have a high threshold to meet in order to be enforceable.
It should be noted that non-compete provisions often include a geographic and temporal prohibition, and they may outline prohibited activities. In cases where the outlined geographic scope, time limits or prohibited activities are unreasonable (i.e. too broad or unnecessary, or even ambiguous), it is likely the clause will not be enforced, or the clause will be read down (i.e. the court may reduce the geographic or time restraints if they are deemed unreasonable). Courts generally prefer to order a clause unenforceable over modifying it for use. Reasonableness also depends on the nature of the industry – some may warrant greater geographical limitations than others.
Considerations for Employers
Employers should try to use such restrictive covenants in a way that is as minimally restrictive as possible; often, it is found that a non-solicitation clause in a contract suffices. Where employers may be concerned about protecting their clients and proprietary information, it is recommended that they seek the advice of an employment lawyer in order to ensure that they have carefully-drafted restrictive covenant provisions in place that can withstand court scrutiny. Such provisions would need to be drafted in a strict and narrow manner. In order to craft an enforceable clause, it is generally recommended that the clause:
– Be limited in duration and geography (not too long nor too broad, respectively);
– List the specific prohibited activities;
– Avoid vague or ambiguous language; and
– Generally have a public interest in enforcing it.
In addition, it is recommended that employers only apply non-compete clauses for those contracts and positions where it is necessary to legitimately protect their proprietary interests and avoid blindly inserting them into all employment contracts.
It is important that employment contracts be crafted carefully and with due diligence, in order to protect the interests of all parties involved and preventing disputes down the road.
Nothing in this article should be considered or relied on as legal advice or opinion. This article only provides general information and should you have any further questions regarding non-compete agreements or employment contract matters in general, please contact us to book a free initial consultation 905-366-0202 or through our website here.