In some industries, an ex-employee represents a risk. They may possess valuable confidential information or client relationships, so employers try to minimize that risk with a contractual agreement called a non-compete clause.
What does it do?
Basically, it means the ex-employee won’t take business away from their former employer by doing things like starting their own similar business or working for a close competitor. The clause will sometimes include geographic limitations, maybe saying the ex-employee can’t work within a specific territory or distance around their former employer.
In legal terms, it’s referred to as a type of “restrictive covenant.”
Is it different from a non-solicitation clause?
A non-solicitation clause is a similar type of restrictive covenant, but it prevents the leaving employee from contacting any of their former clients for competitive purposes. For example, if you were a salesperson with many clients for Company X, those are the company’s clients, not yours. You can’t try to take them if you leave and take a job with Company Y.
Past court decisions have found that a non-solicitation clause is usually sufficient to protect the employer’s interests, so a non-compete clause may be unnecessary.
How long do they last?
That’s up to the employer, although overly long restrictions are one of the primary reasons why these clauses may not hold up in court. They’re often between one to two years.
Are they enforceable?
The courts have typically taken a dim view of non-competition clauses since they limit the employee’s ability to earn a living. Ex-employees are usually permitted to compete with their old employer so long as they don’t use confidential information taken from that employer.
On the other hand, courts have been more approving of non-solicitation clauses.
“Reasonableness” is the overriding concern for any restrictive clause. A 2009 Supreme Court of Canada decision established three standards for a reasonable restrictive clause:
- It must have a reasonable geographical scope.
- It must have a reasonable time limit.
- It must be reasonable in the activities it seeks to restrict.
Past court cases have also considered the following:
When was it signed? If you’re given a clause to sign after you start work — even on your first day — it’s not enforceable unless the employer offers something of value in exchange, like a bonus or promotion.
Was it signed voluntarily? If your boss tries to force or threaten you into signing a clause, it likewise won’t hold up in court.
While an unreasonable clause is typically thrown out, a court may “read down” the clause, meaning they can amend it to erase certain problematic parts.
I’ve been fired. Is my clause still valid?
If you’ve been wrongfully terminated, you can’t be held to any restrictive covenants in your contract. If you were legally terminated, with all appropriate notice and pay, the clause is still in effect, provided it isn’t legally unreasonable in some way.
If you’re faced with signing a clause that you feel is unreasonable, talk to an employment lawyer to discuss your best options.
Restrictive covenants in employment contracts: Canadian approach
Top ten issues for employers: restrictive covenants in Canada