Restrictive covenants in employment contracts must be reasonable

Companies that want employees to sign non-competition or non-solicitation agreements have to ensure these documents are appropriately structured or else they will not be enforceable, says Toronto employment lawyer Ellen Low.

“Whenever I draft an employment agreement, I always ask the employer if it needs non-competition and non-solicitation provisions, and the answer is usually, ‘Yes,’” says Low, principal of Ellen Low Employment Law. “It comes up more often than you think.”

Low offers these guidelines for creating contracts to prevent ex-employees from directly competing after leaving the firm.

Make sure they are needed

“Non-competition or non-solicitation agreements are necessary for employees with fiduciary or executive responsibility because the contracts set out restrictions the parties believe are fair and reasonable between themselves, concerning the activities, timeline and geographic scope,” Low tells

While a fiduciary already has an implied duty in that regard, “having it in a contract makes it much stronger,” she says.

For general or lower-level employees, Low says these agreements are usually not necessary.

“In either case, you still want to have a strong non-disclosure/confidentiality agreements in place with all employees,” she says.

A seminal 1978 Supreme Court of Canada decision is the benchmark for determining valid agreements, Low says, explaining the court ruled restrictive covenants could only be upheld "if they are reasonable between the parties and with reference to the public interest."

“The court is doing a bit of a balancing act, trying to assess the overall reasonableness of this restrictive covenant and restraint in trade,” she explains.

If the employer has a genuine interest to protect, she says these agreements give them the ability to contract with the employee to do precisely that.

“On the other hand, when employees leave a firm, they need to get another job, so we don't want to overly restrict people from finding new employment,” she says.

Agreements should be narrowly defined

“The more precisely you can state what the employee can and cannot do, the more likely it is the court might enforce that non-competition agreement,” says Low.

She cites an Ontario Superior Court of Justice decision, where a man signed a non-competition clause that stated he could not work for a competitor within 750 miles of his old employer’s production facility for two years.

“That’s a long period of time, and there was also a non-solicitation clause that prevented him from contacting any person, firm, corporation, government or agency that he dealt with during his employment for the past two years,” says Low.

The ex-employee argued the restrictive covenant in the agreement was vague, overly broad and unreasonable, plus unconscionable, because he was not encouraged to obtain legal advice before signing the agreement.

“The court reiterated the general rule that these restrictive covenants are, generally speaking, unenforceable, unless they're reasonable between the parties and not adverse to the public interest,” says Low. “The court reconfirmed that if a restrictive covenant is ambiguous in respect to time, activity or geographical area, the provision will likely be found to be unreasonable and thrown out.”

While the non-competition clause was deemed unenforceable because the geographical area was not clearly defined, she says she was surprised to see the non-solicitation clause was upheld.

“There’s a fair amount of case law on what is considered solicitation, as it is generally recognized that a restriction on it does not prevent general advertising, including marketing materials in trade journals, as long as you are not using confidential information,” Low says.

Practise good contract conduct

“When you're asking an employee to sign a non-competition agreement, it is a contract, and so there has to be acceptance and some consideration that flows in exchange for signing it," she says.

Give employees adequate time to review the documents, Low says, and the opportunity to seek legal advice before signing the agreement, especially if it has restrictive covenants contained within it.

Seek legal counsel

To increase the likelihood of a non-competition or non-solicitation agreement standing up in court, work with an employment lawyer and tailor it to your needs, says Low.

“If you're hoping for enforceable provisions, copying and pasting from the internet will likely not do it for you,” she says.

Low says this topic brings to mind one of her “favourite quotes of all time,” contained in a 2008 Supreme Court of Canada decision.

It reads: “Courts should not be reading restrictive terms into employment contracts that could have been negotiated sometime prior to the dissolution of the employment relationship. In the global world, the titans of finance and industry pay millions in exchange for their executives executing non-competition clauses. Why should courts be handing them out for free when it comes to employees of lesser stature?”

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