What is a non-competition or non-solicitation covenant?
Many employment contracts contain clauses limiting an employee's ability to compete against the employer for a certain period of time after the employment ends. These provisions are referred to as restrictive covenants or "non-competition and non-solicitation covenants." These covenants are also referred to as “non-competition and non-solicitation clauses.” A non-competition covenant limits any competing business whatsoever, while a non-solicitation covenant simply limits the employee from contacting the company's clients, suppliers and/or employees.
Who is bound by non-competition and non-solicitation covenants?
In the vast majority of cases, employees must sign a written agreement in order to be bound by non-competition and non-solicitation covenants. However, some employees called "fiduciary employees", can be bound by non-competition and non-solicitation obligations even without a corresponding clause in their employment contract. Fiduciary employees are those to whom the company is particularly vulnerable, like senior executives, or employees who are the public face of the company.
Are non-competition and non-solicitation covenants enforceable?
Non-competition clauses are prohibited in Ontario with some exceptions. Non-competition clauses may still be enforceable in agreements with executives such as CEOs, COOS, and CFOs. Non-competition clauses may also be enforceable if they are connected with the sale or lease of a business, the non-competition clause is part of the sale, and the seller becomes an employee of the purchaser. At this time, no other jurisdiction in Canada has prohibited non-competition clauses.
However, no matter the jurisdiction, Courts are hesitant to enforce restrictive covenants unless the employer can demonstrate the restrictions are reasonable or as minimally restrictive as possible. As such, a non-competition clause will likely be unenforceable if a non-solicitation clause would have been sufficient to protect the employer’s interests.
Drafting an enforceable restrictive covenant is difficult. Restrictive covenants need to be carefully drafted to ensure that the scope of the covenants are reasonable as well ensuring that the covenants are unambiguous and understandable to the employee. Courts have developed specific requirements for both non-competition and non-solicitation covenants. In general, Courts will assess the reasonableness of restrictive covenants based on the geographic area of the restriction, the duration of the restriction, and the extent of the activity being restrained. They will consider the reasonableness of the limitations in the specific context of the employee. Courts will not “fix” a restrictive covenant to make it enforceable. If they decide a restrictive covenant is overly broad or unenforceable, the court will simply treat it as if it does not exist.
In jurisdictions, or the specific circumstances, in which non-competition clauses are allowed, they must be time-limited and subject to clear, reasonable, and easily ascertainable geographical limitations. The restricted activity must also be reasonable. For example, an accounting company may be able to restrict its former employees from providing competing services to its clients, but it cannot restrict former employees from providing other services, such as building maintenance. The provision must be reasonable enough that it does not prevent the employee from earning a living in the same industry.
Non-solicitation covenants must also have reasonable restrictions regarding the duration, geographic area, and restricted activity. The employee must also be able to easily ascertain exactly who they are prevented from soliciting. For instance, a multinational company would likely be unable to restrict former employees from soliciting all of its clients, since the employees may not know who is or isn't a client. Further, when drafting a non-solicitation clause, it is important to ensure that it does not function as a non-competition clause in disguise. When assessing enforceability, Courts will look at how a restrictive covenant functions rather than how it is labelled – this is particularly important to remember in Ontario where non-competition clauses are prohibited.
What can a company do if a former employee is soliciting its clients?
It is common for client-facing employees to be "poached" by a competitor or to start their own business, taking their client list with them. Generally, the first step is to send a letter to the former employee insisting that they obey their restrictive covenants or fiduciary obligations. If the conduct continues, the employer may sue the ex-employee for the breach. The court can award injunctive relief if the employer presents evidence that the business could suffer irreparable harm. If the damage is already done, the court may order a monetary award based upon either the profits gained through the breach, or profits lost by the business. We strongly recommend consulting with an experienced employment lawyer prior to taking any action against the former employee.
What can Hyde HR Law do for my company?
The lawyers at Hyde HR Law are experts in non-competition and non-solicitation obligations, including taking legal action against former employees and competitors for any breach. We will advise you on best practices for safeguarding your business interests and help you protect your clients, suppliers and employees, by drafting enforceable restrictive covenants. We have represented countless employer clients in legal proceedings, enforcing their rights to protect their business from departing employees. Contact us today.