When employees leave their employment, they may take with them a tremendous amount of information about the business of their former employer. With some exceptions, those employees could go on to compete with their former employer, as long as they don’t use that employer’s confidential information. For this reason, employers often include clauses in employment contracts to address this exact scenario, commonly referred to as restrictive covenants.
Simply because such covenants are included in employment agreements does not mean they will automatically be enforced by Canadian courts. Generally speaking, courts will not enforce restrictive covenants that unnecessarily restrict an employee's freedom to earn a livelihood after the end of the employment relationship. In the 2016 case of Donaldson Travel Inc. v. Murphy, the Ontario Court of Appeal considered a non-competition clause to be void, once again reminding employers that there are limits to the limits that can be imposed on former employees.
In order to provide some guidance for dealing with such clauses, this blog will look at:
- Different types of restrictive covenants;
- Criteria considered by the courts in deciding whether to enforce non-competition clauses; and
- The decision in Donaldson Travel Inc. v. Murphy and its implications for this area of law.
Restrictive covenants – the basics
Clauses in contracts that prevent the parties from taking certain actions or steps post-employment (and sometimes also during their employment) are known as restrictive covenants. In particular, these contractual terms are usually designed to protect a business from competition or solicitation by a former employee that could ultimately harm that business.
The two main types of restrictive covenants that are commonly encountered are non-competition and non-solicitation clauses. A hybrid, known as the “no-deal” clause, has also developed and is rearing its head in employment negotiations. While these terms are often used interchangeably in everyday conversation, they have different meanings:
- A non-competition clause prohibits a former employee from becoming engaged in a business that competes with the business of his or her former employer.
- A non-solicitation clause prohibits a former employee from soliciting the customers or employees of his or her former employer.
- A “no-deal” provision prohibits employees from having dealings with customers, even absent solicitation. For example, if a customer of a previous employer was to contact the former employee after seeing their update on LinkedIn, that employee would still not be able to engage in business with that customer.
In the absence of such clauses, former employees can compete with their former employer as long as they don’t use that employer’s confidential information. Note, however, that there are a few exceptions to this rule, which include fiduciary employees who continue to have additional obligations to their previous employer – these exceptions will not be canvassed in this blog post.
Criteria considered when evaluating non-competition clauses
Generally, these non-competition clauses are considered contrary to public policy given the restraints on trade, but they can be justified when what an employer is trying to limit is reasonable in terms of the interests of the parties concerned and those of the public. When dealing with employment contracts, a rigorous level of scrutiny is applied in assessing the reasonableness of these clauses.
The criteria that courts use to assess the reasonableness of these clauses can be summarized as follows:
- The restraint must protect a proprietary interest of the employer. That is, the prohibition must be linked to the business activities of the employer.
- The restraint must be reasonable in terms of the timeframe during which the activity is prohibited. The longer the period that a former employee is prohibited from competing, the harder a clause will be to enforce.
- The restraint must be reasonable in terms of the geographic area in which a former employee is prohibited from carrying on an activity. If the prohibition extends to a geographical area where the former employer does not do business, it will be harder to justify.
- The restraint must be reasonable in terms of the nature of the activity it prohibits.
- The prohibited activity should be linked to the activities performed by the former employee for the former employer.
- Finally, the clause will be considered in terms of its overall fairness. The courts have held that where a non-solicitation (customers and employees) clause will adequately protect a business, a broader non-competition clause will not be upheld.
Overall, a non-competition clause cannot unreasonably preclude a former employee from obtaining new employment.
The Donaldson Travel Inc. v. Murphy decision
In Donaldson Travel Inc. v. Murphy, the Ontario Court of Appeal upheld a summary judgment decision that found a restrictive covenant to be void.
The clause in question read as follows:
[The employee] agrees that in the event of termination or resignation that she will not solicit or accept business from any corporate accounts or customers that are serviced by [the former employer], directly, or indirectly.
Relying largely on the words “or accept business”, the motion judge found that this clause restricted competition, and therefore was a non-competition clause and not merely a non-solicitation clause, as was argued by the employer. Applying the criteria noted above, the courts held that the clause was void as it did not include a time limit for its application.
Employees can take comfort in knowing that a clause that is not expressly referred to as a non-competition clause will nevertheless be treated as one if it has the effect of restricting competition. This treatment will result in a higher level of scrutiny than may otherwise be used in determining whether the clause is enforceable, as would be the case for a non-solicitation clause.
If you are presented with a new employment contract that includes a restrictive covenant and want to know what you’re signing on to, or if you’d like to understand what you can or cannot do post-employment, contact our Employment Law Group to find out your rights and your obligations.