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08. Restrictive Covenants

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08. Restrictive Covenants

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 

Non-compete clauses

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.

Enforcement of Restrictive Covenants – Process and Remedies

Where an employer has reason to believe that a former employee may be breaching the applicable restrictive covenants, they will generally begin by sending a letter to the former employee reminding him or her of the restrictive covenants, and directing the former employee to cease and desist competing with the employer or soliciting the employer’s clients or employees. If this course of action is not successful, an employer who wishes to enforce a restrictive covenant will generally seek an injunction from a court due to the time-sensitive nature of the issue. Injunctive relief will be granted by a court only where the following “threefold test” is satisfied:

  • the applicant has presented a serious issue to be tried;
  • the applicant would suffer irreparable harm if the application were refused; and
  • the applicant would likely suffer greater harm from the refusal than the defendant would suffer from the granting.

Courts have generally recognised that the diversion of customers to a competitor may have irreversible consequences to a business. However, a court will not grant injunctive relief unless the applicant is able to demonstrate a strong prima facie case that the terms of the restrictive covenant is reasonable, and that the defendant is in fact engaging in activities that breach the restrictive covenant.

Use and Limitations of Garden Leave

“Garden leave” is a period of time during which an employee is paid by an employer to refrain from commencing employment with a new employer. The employee therefore continues to be notionally employed and paid his or her salary without being required to perform any work. Garden leave is fairly uncommon in Canada, although some employers have begun to view garden leave as a viable alternative to restrictive covenants which are notoriously difficult to enforce. For example, the contract of employment may state that contract of employment may be terminated by either party upon the provision of notice, and that the employee may or may not be required to continue to provide active service during the notice period. A similar provision has been found to be enforceable in at least one reported decision in Ontario.

In the absence of any contractual provision contemplating that an employer may remove some or all of an employee’s job duties, there is some risk that an employee placed on garden leave may claim that he or she has been constructively dismissed, and therefore entitled to treat the employment relationship as severed, and immediately begin seeking other employment.

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