The modern world has created a new working landscape – one in which loyalty has become less prominent as employees regularly seek out a ‘better’ employment opportunity around every corner. Whether it is a long-standing employee who has worked their way up through the ranks or a short-service employee looking for just the right fit, it has become critical for employers to protect their business interests in the wake of a revolving door of incoming and outgoing employees.
Twenty years ago, only a small percentage of employees were asked to sign an employment agreement before they commenced employment. At best, there may have been a one-page offer letter outlining their salary and vacation entitlement. Today, however, the reverse is true – a large majority of employees are now presented with employment agreements, contracts and/or comprehensive offer letters in an attempt to minimize the company’s exposure when the relationship ends.
However, even with the rise of employment agreements, it is not uncommon for employees to shirk their legal obligations upon the cessation of the employment relationship. A frequent example: a departing employee decides to set up shop down the street from their former employer, contacting previous customers, clients and suppliers in an effort to garner business for their new start-up at the expense of the former employer.
Perhaps it is because the individual did not have any restrictive covenants in their employment agreement. Or maybe the non-competition restriction was so broad and vague, that the individual has received legal advice that the clause is void and unenforceable. It is also possible that even where the former employee signed a strict employment agreement, the individual simply does not believe that the company would ever come after them. Regardless of the reason, in order to use the restrictive covenant as a “sword” against a former employee, employers must ensure that such clauses are properly drafted and implemented.
There are two types of restrictive covenants commonly (i) non-competition clause; and (ii) non-solicitation clause.
Generally speaking, non-competition clauses have become increasingly controversial over the years partly due to the fact that an individual is forced to stay out of an industry in which they have worked their entire lives. The courts, while reluctant to interfere in contracts negotiated between sophisticated business people, have characterized many non-competition clauses as an “unfair restraint of trade” or an impairment on one’s ability to earn a livelihood. In order to be valid and enforceable, non-competition clauses must be as precise, narrow and clear as possible. This means defining geographical scope and having temporal limits in place. The shorter the restriction (if also defined narrowly), the more likely it will be upheld by a court.
The jurisprudence indicates a distinct preference towards non-solicitation clauses – courts have determined that non-competition clauses should only be used in situations where a properly drafted non-solicitation clause cannot adequately protect the employer’s business interests. Accordingly, apart from the termination clause limiting a company’s liability, it is the non-solicitation clause which now seems to have taken over as the “hot clause” intended to protect employers from departing employees.
This blog is provided as information and a summary of workplace legal issues.
This information is not intended as legal advice.