Restrictive Covenants in Employment Contracts

A while back we wrote about the importance of written employment contracts and we referred to various key clauses that an employer should include or should at least consider including in a post-employment restrictive covenant, otherwise known as a non-solicitation/non-competition clause. Such clauses are optional. You will never be legally wrong for not including such a clause in an employment contract, but depending on the nature of your business and the job being performed by the employee, you may want to consider including such a section for your own protection as an employer in the future.

The concepts are simple enough on their face. A non-competition clause prevents the employee from competing with their employer for a period of time after their employment ends. A non-solicitation clause restricts the employee from soliciting business from clients or customers of their employer (or sometimes also from luring away employees of their employer) for a period of time after the employment relationship ends.

These clauses (restrictive covenants) are not enforceable unless they are “reasonable”. Whether or not they are reasonable is a question that was answered via a test set out in Aurum Ceramic Dental Laboratories Ltd. v. Hwang (1998), 77 A.C.W.S. (3d) 161, [1998] B.C.J. No. 190 (S.C.) at para. 11, where Justice Brenner provided a test for the reasonableness of such employment restrictive covenants. He stated that a restrictive covenant will be reasonable where:

(a) it protects a legitimate proprietary interest of the employer,

(b) the restraint is reasonable between the parties in terms of:

(i) temporal length;

(ii) spatial area covered;

(iii) nature of activities prohibited; and

(iv) overall fairness;

(c) the terms of the restraint are clear, certain and not vague: and

(d) the restraint is reasonable in terms of the public interest with the onus on the party seeking to strike out the restraint.

The first part identifies the starting point for determining reasonableness, which is that the clause must be necessary to protect the interests of the employer; so the employee’s work duties must be such that if he were to immediately go and work for a competitor or start soliciting your customers, it would have a negative impact on your business; the idea behind this being that business owners spend time and money establishing their businesses and have provided jobs to their employees. During the course of their employment, employees may establish business relationships with the employer’s customers, but such relationships are based on the employer’s goodwill, so the employer should have an opportunity to shore up his or her relationships with clients and customers before a recently departed employee can begin soliciting them for the employee’s own business.

If it seems that some post-employment restraint on the employee’s activities is necessary to protect the employer’s business relationships, then it must not be overbroad in its scope. It must be of a duration and covering a geographical area that are sufficient to protect the former employer, but not such that it unreasonably prevents the employee from earning a living. For example, a non-competition/non-solicitation clause that is in effect for years unenforceable compared to one that effective months. Similarly, the geographic area in which the employee is prohibited from competing should not be larger than is necessary to protect the employer’s business relationships with clients and customers. (A geographical area might refer to a city or group of cities, but it if starts including whole provinces, it would possibly be too broad.) The danger of having a too-broad restrictive covenant is that the Courts may strike it out altogether. In the leading Supreme Court of Canada case on this issue (Shafron v. K.R.G. Insurance Brokers (Western) Inc., 2009 SCC 6), the Court found that an unreasonable restrictive covenant will not be “read down” to a less restrictive level, but will generally just be removed from the contract.

There isn’t a precise formula to determine what sort of restriction is reasonable and would be enforceable, but there is a body of case law in which the Courts has examined particular employer/employee relationships and the restrictive covenants in question and have made determinations on what is and is not permissible in each situation.

The drafting of these clauses is crucial; if the particular restrictions are not explained clearly the clause may not be enforceable. This is particularly true when describing the geographical area in which the restriction is to occur; for example, saying that the employee cannot compete in the “lower mainland” may be too vague to be enforceable. Precise language and descriptions must be used.

So the first step in considering whether to include such a clause in your employment contract is: is it necessary to protect my business? Next, ask yourself how long after a given employee leaves will you reasonably need to cement your existing business relationships against future competition from the newly departed employee? In what geographic areas is your business vulnerable to competition? The next step is to have a lawyer ensure that the desired clauses are properly drafted and are more likely than not to be upheld, should the contract be challenged in Court.

It is possible to successfully use these restrictive covenants to protect your business from suffering future competitive disadvantage and damage to relationships with clients and customers related to departing employees, but they must be considered and crafted carefully to ensure they will be enforceable and have the desired effect.

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