During the course of an employee’s tenure with a company, they usually gain certain skills and knowledge that makes them more valuable to the company. However, this also means that they’re valuable to other employers, increasing the risk of losing them. Employers can try to mitigate potential damage of an employee joining a competitor with restrictive covenants, but this can be problematic.
Restrictive covenants are a way employers can protect themselves from potential harm if an employee leaves for another company, but the reality is that, in Canada, such agreements are difficult to enforce. Canadian employment law recognizes the imbalance of power between employers and employees, and restrictive covenants are generally viewed as a restraint of trade on employees and ultimately the employer exercising that advantage. As a result, it’s difficult for employers to develop restrictive covenants that hold up to scrutiny – but not impossible.
Generally speaking, there are three main types of restrictive covenants. The first is the non-compete agreement. This prevents the employee from taking action that directly competes with the employer’s business for a specified period of time and sometimes within a specified geographic area around the employer’s physical location. The purpose of non-compete agreements is to keep employees from harming the employer’s business by working with a competitor or directly competing with the employer, but they are rarely enforceable in Canada as they are seen as not to be in the public’s interest.
A common problem with non-competition clauses is that they’re too broad in their restrictions. When they establish a certain time period and geographical area, it’s easy to go overboard. Generally, temporal and geographic restrictions are seen as too much interference in a worker’s ability to work to be enforceable, unless the employer can clearly outline legitimate and specific business interests that are at risk from the employee competing against it.
The current state of Canadian employment law leaves most non-competition clauses unenforceable, due to their restraint on a worker’s ability to earn a living. Most employees develop skills optimal for a particular industry, so most of their potential employers with similar job opportunities may be competitors. Preventing someone from finding similar employment in their career is unreasonable to most legal decision-makers.
Non-solicitation agreements – a better option?
The second type of restrictive covenant is the non-solicitation agreement. This purports to prevent an employee who leaves from directly soliciting the employer’s clients – again, usually for a specific period of time. The idea is to protect employers from a situation where an employee gains knowledge and builds rapport with a client and then steals that client after they leave the employer.
Non-solicitation agreements have a better chance of passing muster, as the employee is still able to obtain employment within the same industry. However, such agreements have to be pretty clear and, again, not go overboard. For example, a departing employee can be prohibited from soliciting the employer’s clients directly, but if a client independently reaches out to the employee, that usually can’t be restricted. In addition, a time period beyond 24 months is rarely considered to be reasonable for such restrictions for any restrictive covenant. Clarity is key, such as clearly defining specific circumstances to which the restrictions apply.
A third common type is the confidentiality agreement. Employees can gain a significant amount of knowledge about the employer’s inside information, strategies, processes, and products, so it’s understandable that employers would be worried about them revealing confidential information to their next employer. Confidentiality agreements aim to keep such information secure, preventing departing employees from sharing it with anyone else when they move on. Confidentiality agreements are the most likely to be upheld, as long as they deal with specific confidential and proprietary information belonging to the employer.
Reasonable restrictions
The challenge for employers in the Canadian market is to have restrictive covenants that hold up to legal scrutiny on whether they’re reasonable. And there are many elements that can make them unreasonable, leading to courts and other decision-makers striking them down.
For example, in Camino Modular Systems Inc. v. Kranidis, an Ontario court declined to uphold restrictive covenants for an executive who left his employer to work for a direct competitor in the flooring industry. The non-competition agreement was unenforceable because the employer was unable to demonstrate specific information or products that needed protection or why the 12-month period was necessary for the flooring industry. The non-solicitation agreement was also deemed unenforceable, because customers in the industry moved around and weren’t exclusive, making the agreement too broad. Finally, the confidentiality agreement was also seen as too broad, as it didn’t have a specified time period banning the executive from disclosing information, some of which was part of his general experience in the industry.
However, in a case that went in the employer’s favour, an Alberta court upheld a non-solicitation agreement with a narrow focus on the employer’s business. In Catch Engineering Partnership v. Mai, a worker resigned his position and soon started performing work for a client of the employer. The employer was able to prove that it had a legitimate business interest in protecting its client relationships, as its business involved providing skilled workers to clients. It couldn’t allow employees to appropriate those relationships, and the 12-month period of the non-solicitation agreement was directly tied to the length of the employer’s client agreements.
While there’s a high bar in Canada for restrictive covenants to beenforceable, it’s possible with careful drafting. Here are some things employers can do to craft strong agreements:
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- Assess and define legitimate business interests
- Keep the restrictions narrow and well-defined
- Use non-solicitation agreements instead of non-competition agreements
- Review and change restrictive covenants on a regular basis – don’t use a template that’s too general and vague.
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