In the employment context, the term “restrictive covenant” refers to terms in employment contracts which attempt to limit what employees can do after the end of the employment relationship. Such terms may be enforceable where the employee quits his or her job, or where it is terminated, with or without cause. Generally speaking, restrictive covenants take the form of what are known as “non-competition” and “non-solicitation” agreements or clauses.
Simply put, non-solicitation provisions prevent employees from approaching and soliciting clients, employees, and business partners of the previous employer, such as suppliers, once the employment ends. Non-competition provisions seek to prevent employees from working for a competitor business or setting up their own competing business. The latter are considered more restrictive as they can have the effect of restraining work in an industry, making it difficult for the employee to earn a living. Courts will generally be reluctant to interfere with an individual’s ability to work and make a living, therefore, the standards for enforceability of restrictive covenants are high, especially so in the case of non-competition agreements.
The Court in Ford v. Keegan, 2014 ONSC 4989, put the legal test for enforceability of restrictive covenants in simple terms. To be valid and enforceable, the covenants must be reasonable with regard to the limitations imposed, being the type of activity prohibited, the restricted geographical area, and the length of time for which the restrictions will apply. Additionally, employers seeking to enforce restrictive covenants will also have the onus of showing they have a valid proprietary interest entitled to protection, such as confidential information, client information and access, and trade secrets.
For example, when a dental office hires a new dentist to provide services, it may include a restrictive covenant in the agreement. The restrictive provisions may state that all clients belong to the dental office, and upon leaving, the dentist will not be allowed to solicit any of the clients to follow him or her to a new dental practice. Similarly, the agreement may stipulate that the dentist may not approach other employees of the dental office to follow him or her. For such terms to be enforceable, the employer will have to show that they are reasonable.
Whether a restrictive covenant is found to be reasonable by the Court, will depend on the context of each situation. In the context of the example above, if the restrictions are to be in force for an indefinite period of time, or a lengthy period, such as 10 years, and are applicable throughout all of Ontario, then the Court is unlikely to find that they are reasonable. This is because the Court will be hesitant to prevent the dentist from carrying on the profession as he or she wishes for such a long, or even indefinite, period, and within such a broad geographical area. On the other hand, if the restrictions were to apply for only 1 to 2 years, and they were limited to the City of Toronto, or even just a sector of the City, then a Court would be much more likely to find that they are reasonable. The Court may see the latter restrictions as a reasonable measure by the dental office to protect a business interest such as clients, and other employees, from being recruited away by a previous employee, who would have had access to them because of his or her employment.
While the principle of reasonableness applies to both non-solicitation and non-competition agreements, non-competition agreements are generally much more difficult to enforce. Courts have held that where a non-solicitation agreement would suffice to protect the employer’s business interest, it will not enforce a non-competition provision. Because of this, non-competition provisions are normally reserved for circumstances such as the sale of a business, as they may be reasonably required to prevent the seller of a business from opening a competing business immediately after completing the sale, and thereafter taking back clients and employees from the business he or she just sold.
When an employer intends to restrict the activities of a previous employee, the Court will also consider the position the employee held. This is so because depending on the position, the employee may owe fiduciary duties to the employer, which effectively require the employee to put the best interest of the employer first. Such duties may continue even after the employment relationship ends.
It can be difficult for employees to determine if a non-solicitation or non-competition agreement is reasonable, and whether they owe fiduciary duties to the employer, although the latter is implied when it concerns senior executives or senior managerial positions. Most employees are not in a position to negotiate the terms of their employment agreements so these issues do not often arise until after the end of the employment relationship, and the employer attempts to enforce them. Because of this, it is important to consult a lawyer to seek advice regarding the enforceability of restrictive covenants in employment agreements, and the restrictions therein.
As lawyers with expertise in employment law, we often advise our clients on these matters. You may contact us at any time with your questions.