As an employer in the fast-paced and competitive world of today, you need to protect your interests. During their tenure, employees often get a deep insight into your company’s operations, trade secrets, and client relationships. If departing employees exploit these valuable assets, it can become a serious risk to your business.
Restrictive covenants (legal tools inserted into employment contracts) are relied upon by many employers to safeguard against such threats. Mainly, non-solicitation and non-competition clauses are used to protect your proprietary information, client base, and your business from unfair competition. Nevertheless, courts scrutinize their enforceability when it comes to these clauses.
What Are Restrictive Covenants?
Restrictive covenants are contractual provisions that restrict what an employee can do after they leave and no longer work for you. These clauses are designed to protect your business from the harm a former employee may inflict on you by using what they learned or know to compete against you. A labour lawyer in Toronto can help you draft these clauses so that they comply with the law and are most enforceable.
Non-solicitation and non-competition clauses are among the most common restrictive covenants. A non-solicitation clause prohibits a former employee from soliciting your clients, customers, or even employees to join a competing enterprise. Then there’s a non-competition clause, which is intended to prevent someone from working for a rival or even starting a competing business. Every one of them serves their purpose and is necessary for keeping your business competitive
Non-Competition vs. Non-Solicitation
First glance at non-solicitation and non-competition clauses may lead you to think they are similar, but they are not. A non-competition clause is broader than that, preventing your former employee from working for competing businesses or working independently to compete with you. That’s why this type of clause is so helpful when a departing employee has a deep knowledge of your business model, trade secrets, or key strategies.
On the other hand, non-solicitation clauses restrict targeted actions to compete. These clauses are meant to stop a former employee from contacting your clients or employees to solicit business or recruit talent. For example, a previous salesperson might not immediately reach out to your clients and try selling you the same type of products or services at their new company. However, the solicitation does not include passive activities such as announcing a new role on LinkedIn.
Case law illustrates that the boundaries of what constitutes solicitation can be nuanced. For example, the Ontario Court of Appeal set out in HJ Staebler Co v. Allan, 2008 ONCA 576. Non-competition clauses try to limit general competition, while non-solicitation clauses are aimed at specific efforts to poach business, Allan said. When drafting clauses that will balance your interests with fairness to employees, it is essential to make this distinction.
Judicial Interpretation of Restrictive Covenants
Courts often scrutinize restrictive covenants, and their enforcement depends on clarity and reasonableness. Vague clauses can be seen in the case of Donaldson Travel Inc. v. Murphy. In the case before it, the Court of Appeal here struck down a clause forbidding a former employee from ‘accepting business’ from former clients, finding that, even though that might have been a non-solicitation clause, it was too broad and amounted to a non-competition agreement.The clause was unenforceable by this ambiguity.
Such cases highlight the need for precision in language. A good clause should be well drafted and should not be used to constrain its scope.
Enforcing Restrictive Covenants
Generally, courts in Canada are not eager to enforce restrictive covenants, especially non-competition clauses, which may limit individuals from earning a living or pursuing opportunities in their field. By contrast, non-solicitation clauses are considered less restrictive and are more often enforced, and in Lyons v. The Ontario Court of Appeal reminded us of this preference, as Multari noted that non-competition clauses should only be used where non-solicitation clauses are not sufficient to protect legitimate business interests.
This judicial stance reflects a fundamental principle: The restrictive covenants must strike the balance between protecting a business and allowing former employees to have meaningful work.
Legal Test for Enforceability
A restrictive covenant will be closely scrutinized by courts and asked whether the covenant is reasonable and necessary to protect your legitimate business interests. The geographic scope of the clause, its duration and the activities it prohibits are one of the key factors. For instance, if a life insurance agent is restricted to a single city, a clause that prohibits them from soliciting clients across an entire province may be too broad.
Reasonableness is paramount. The more restrictive the covenant, the greater the probability that a court will rule it unenforceable. Therefore, it is advisable to make every clause specific to your business and the employee’s job.
Implied Duty Not to Solicit
Even if there is no explicit restrictive covenant, some employees, such as senior executives or directors, may be bound by fiduciary duties that include an implied duty not to solicit clients or employees. The obligations that arise out of the trust and discretion involved in such positions can survive the end of the employment relationship. Canadian courts have a flexible approach to fiduciary duties and adjust them to the facts of each case.
Practical Considerations for Employers
Think about the unique responsibilities and risks each employee might pose when drafting restrictive covenants. Don’t be one size fits all. Restrict them as much as you need to, but keep in mind that you don’t want to go too far as to hamper their ability to pursue their career. Avoid using any ambiguous language that can be misinterpreted. A narrowly focused non-solicitation clause will adequately protect your interests without going beyond what is legal.
Working with a Toronto-based skilled labour lawyer is essential because it will ensure that your restrictive covenants are legally compliant and strategically aligned with your business goals.
Protecting your business from departing employees is as vital as restrictive covenants. These agreements protect your proprietary information, client relationships, and competitive standing, whether through non-solicitation or non-competition clauses. However, enforceability is dependent on reasonableness, clarity, and necessity. With proper drafting of these clauses and consulting with experts in the law, you can find that balance between protecting your business and respecting your employees’ rights.