Williams HR Law LLP

DEPARTING EMPLOYEES: ARE YOUR ORGANIZATION'S RESTRICTIVE COVENANTS ENFORCABLE?

October 21, 2015

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Employers will often include restrictive covenant clauses in their employment agreements in order to protect their business interests in the event of an employee’s departure from employment. While restrictive covenants can be effective in protecting an organization’s interests, courts often deem such covenants unenforceable because they are overly broad, unenforceable or ambiguous. The Supreme Court of Canada, in J.G. Collins Insurance Agency Ltd v. Elsley Estate, outlined one question that employers should consider when drafting restrictive covenants: is the restrictive covenant “reasonable between the parties and with reference to the public interest”?

Restrictive covenants generally refer to three types of clauses:

  • Non-competition: This clause restricts employees from working for or starting a business which is in competition with the organization.
  • Non-solicitation: This clause restricts employees from soliciting the organization’s clients or other employees upon departure.
  • Confidentiality: This clause restricts employees from taking with them any information or materials that constitute the trade secrets or intellectual property of the organization. Although there are remedies for breach of confidentiality at common law, it is a best practice for employers to include these covenants in their employment agreements.

Restrictive covenants should generally include terms that address the following:

  • Duration: organizations must limit the length of time that restrictive covenants are applicable, and the time period must be reasonable. A non-competition or non-solicitation clause that has no expiry will likely be deemed unenforceable.
  • Geographic scope: restrictive covenants should be confined to a limited geographic area, in most circumstances. Often a clause should only cover the area for which the employee worked during his or her employment.  A clause that does not limit adequately the geographic scope risks being deemed unenforceable. The geographic scope of a clause is particularly important when drafting non-competition clauses, but may also be considered by the courts when evaluating non-solicitation clauses. However, in recent years, courts have recognized the realities of globalization, such that geographic limitations may not be required in non-solicitation clauses.
  • Clientele: a non-solicit clause should generally only include company clients that the employee worked with directly and relatively recently. A clause stating that an employee cannot solicit any of the company’s clients is at risk of being deemed unenforceable, depending on the circumstances.
  • Scope of prohibited activities: both non-solicitation and non-competition clauses should restrict specific activities that former employees are prohibited from performing. For example, former employees should not be restricted from performing any activity for a competing company, but should only be restricted from performing the same duties for a competing company that had been performed during his or her employment.

Courts will generally refuse to amend or ‘blue pencil’ a restrictive covenant if any portion of the clause is deemed to be unenforceable. For example, if a non-competition clause has appropriate limitations on its duration and client scope, the entire clause will still be deemed unenforceable if it does not address the geographic scope of the prohibited activities.

Invariably, employers should seek legal advice to ensure that any restrictive covenants imposed on employees adequately protect the organization’s interests.

 

This blog is provided as information and a summary of workplace legal issues.

This information is not intended as legal advice.

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