Definition and Types of Restrictive Covenants
A restrictive covenant is a contract or contractual provision by which the parties agree that the future conduct of a party will be restricted in some manner. In the employment context, restrictive covenants are most commonly found in employment contracts. Courts have held that restrictive covenants are presumptively unenforceable on the basis that they are considered a restraint of trade contrary to public policy. However, restrictive covenants will be enforceable in certain circumstances.
Notably, certain employees will be subject to certain restrictions following employment termination even in the absence of any restrictive covenants. Such restrictions are based on the employee’s character of employment. An employee whose position involves a significant authority and responsibility, may be a “fiduciary” and consequently have an obligation at common law to refrain from competing with or soliciting the customers or employees of the employer for a reasonable period of time after employment termination.
Types of Restrictive Covenants
A non-competition clause restricts an employee from becoming engaged in a business that competes with the business of his or her former employer following the termination of his or her employment relationship. This type of restrictive covenant is primarily designed to protect an employer’s interest in maintaining its relationships with clients who may follow the employee to a competitor, and protecting the employer’s business opportunities and confidential information from competitors.
Like all restrictive covenants, in order to be enforceable, a non-competition clause must be reasonable between the parties having reference to the public interest, and be reasonable in light of all surrounding circumstances. An enforceable covenant must also be clear and unambiguous. The following factors will be considered by a court in determining whether a restrictive covenant should be enforced:
- did the employer have a proprietary interest entitled to protection?
- are the temporal or spatial limits of the covenant overly broad?
- is the covenant too broad because it proscribes competition generally rather than just the solicitation of the employer’s customers?
Each of the above factors will be considered on a case-by-case basis. Some employers operate globally, which may justify a broader spatial scope for a restrictive covenant. However, if an employee operates only within a limited territory, even for a global operation, a geographically broad non-competition clause may not be justifiable. Canadian courts have recognised that because a non-competition clause is more restrictive than a non-solicitation clause, a non-competition clause will not be enforced where an employer’s interests could be adequately protected by a non-solicitation clause.
Non-solicitation of customers
A non-solicitation of customers’ clause will prevent a former employee from directly contacting or otherwise soliciting clients or customers of the former employer for a period of time following employment termination. Courts will assess the reasonableness of such a restriction in light of the nature of the employee’s role, and the scope of the restriction. In general, the more limited the scope of the restriction, the more likely it is that a court will be willing to enforce the restriction. For example, a restriction prohibiting a former employee from soliciting any customers they personally dealt with during a period of one or two years prior to termination will likely be viewed as more reasonable than a restriction prohibiting the former employee from soliciting any of the employer’s customers. Additionally, a restriction period of a period of several months is more likely to be enforced by a court than a restriction period of a year or more.
Non-solicitation of employees
An employer may seek to restrict a former employee’s ability to solicit the employer’s employees in order to protect its business interests. For example, there may be some risk that a manager or executive may obtain employment at a competitor or establish his or her own competing business, and solicit some or all of the employer’s staff to follow suit. Courts may interpret employee non-solicitation clauses more liberally than non-compete or non-solicitation of client clauses, as employee non-solicitation clauses are generally viewed to be less restrictive.