During the course of employment, an employee may obtain access to confidential information regarding the employer’s business interests, including trade secrets and customer lists. As a result, and in order to protect itself from exploitation, an employer may require the employee to enter into a contract with provisions restricting the employee’s business activities at the end of the employment relationship. These “restrictive covenants” typically take the form of “non-competition” and “non-solicitation” clauses.
A non-competition clause prohibits a former employee from engaging in a business that competes with his or her former employer. By contrast, a non-solicitation clause is narrowly aimed at prohibiting an employee from soliciting the former employer’s customers, clients, suppliers and/or employees.
Upon the termination of employment, most employees are generally free to compete with their former employer and to make use of the knowledge and skills acquired while employed, unless they occupied a senior or managerial role, or are otherwise bound by a valid restrictive covenant.
In Canada, the general rule is that restrictive covenants in employment contracts are unenforceable because they restrict the employee’s ability to earn a livelihood (this is referred to as a “restraint of trade”). However, in exceptional cases, the courts are willing to enforce restrictive covenants as long as they are fair, reasonable and go no further than is necessary to protect the employer’s legitimate business and proprietary interests.
When determining whether a restrictive covenant is reasonable and enforceable, the courts generally look to ensure that:
- the terms of the restraint are clear and unambiguous as to what it prohibits;
- the restraint protects a legitimate proprietary interest of the employer (e.g., trade secrets, customer base, trade connections or goodwill);
- the restraint is not overly broad in terms of its:
- geographic scope;
- nature of activities prohibited; and
- time period (generally, the courts will not enforce restrictive covenants longer than 12 months);
- overall fairness of the restraint; and
- the restraint is reasonable in terms of the public interest – the law distinguishes between a restrictive covenant whose sole purpose is to prevent competition, from one that merely seeks to prohibit the solicitation of the former employer’s clients. As such, the courts will generally not uphold a broader non-competition clause if a non-solicitation clause would adequately protect the employer’s business interests.
Given the imbalance of power usually existing between employers and employees, restrictive covenants in employment contracts attract greater scrutiny by the courts and are generally more difficult to enforce. In order for restrictive covenants to be legally binding, their terms must be clear and reasonable in the restrictions they impose on the ability of a former employee to compete with the company. For instance, in the recent case of Donaldson Travel Inc. v Murphy, the Ontario Court of Appeal held that a non-competition clause, particularly one without a time limit, is unreasonable and therefore will not be enforced by the courts.
From the employee’s perspective, it is always prudent to consult a lawyer to review and ensure that an employment contract does not contain restrictive covenants that may unfairly restrict the employee’s ability to establish or work for a competing business once the employment relationship ends. From the employer’s perspective, it is always prudent to ensure that employment contracts are properly drafted to ensure that restrictive covenants are clear, unambiguous and reasonable in the restrictions they impose on former employees.
Cédric Lamarche is an employment lawyer and partner at Singh Lamarche LLP. He frequently advises employees and employers with respect to various aspects of employment contracts and legal entitlements both at the outset and at the end of employment relationships.
If you have any questions regarding an employment contract or your employment rights, Cédric can be reached by telephone at: 647-799-0499, or by email at: email@example.com.