This month we share some practical advice on employment contracts, non-competition and non-solicitation clauses from Gregory Sim and Caitlyn Field of Field Law.
Of all the employment contract terms and conditions, none are more likely to land you in Court than restrictive covenants —these include non-competition and non-solicitation clauses. While terms can vary, a non-competition clause generally prohibits departing employees from competing with their employer’s business. A non-solicitation clause prohibits departing employees from contacting the employer’s clients to garner their business or persuading other employees to leave the employer too.
Restrictive covenants are hotly contested in court. The Supreme Court of Canada ruled on restrictive covenants in 2009 in KRG Insurance Brokers (Western) Inc. v. Shafron. In that case, an insurance agent was employed by KRG Insurance Brokers under an employment contract with a non-competition clause. The clause stated if the agent left his employment he would be prohibited from being employed by, or being involved with, any other insurance agency in the “metropolitan city of Vancouver.”
More recently in Alberta, the Court of Queen’s Bench considered the scope of non-competition and non-solicitation clauses in Specialized Property Evaluation Control Services Ltd v Les Evaluations Marc Bourret Appraisals Inc. The employer had sought to prohibit competition with the employer within the City of Calgary and within 100 km of its municipal limits for a period of three months and to prohibit solicitation of its clients for a period of six months.
Courts scrutinize restrictive covenants closely to balance the competing interests. On one hand, courts recognize that people and businesses should be free to enter into what¬ever contracts they choose, and those agreements should be enforceable in accordance with the parties’ intentions. On the other hand, restrictive covenants limit employees’ abilities to practice their chosen profession thereby restraining trade—something which the law discourages.
Balancing these interests can be challenging. Courts recognize the inherent power imbalance between employers and employees and how that imbalance impacts both the employee’s ability to negotiate these covenants, and at times the reasonableness of restrictive covenants. For these reasons, the Courts consider restrictive covenants between employers and employees differently from restrictive covenants between businesses, where a power imbalance is less likely and the ability to effectively negotiate terms more likely.1
So how do courts draw the line between the freedom to contract and discouraging restraint of trade? The answer is that courts enforce restrictive covenants when they are reasonable. Restrictive covenants will be deemed reasonable if they meet certain requirements including:
Necessary to protect the employer’s business interests.1,2,3 The employer must have some proprietary business interest deserving of protection. This could mean proprietary business information or techniques, but also the business relationship between the employer’s clients and the employee.
Not too geographically broad or vague.1,2,4 For example, a clinic in one part of the city may attract virtually no clients from another part. Prohibiting competition anywhere in the entire city is probably unreasonable. Prohibiting competition within the same area of the city may be reasonable.
Not too long in duration.1,2,4 If clients usually visit your physiotherapy clinic once a week, then it will only take a few weeks for those clients to be introduced to a new physiotherapist if their usual physiotherapist leaves. A restrictive covenant prohibiting the departing physiotherapist from competing for a much longer time is probably unreasonable.
Appropriate in the context and minimally restrictive. Despite the name, a non-compete clause should not seek to prevent all competition. It should only seek to protect the business’ actual proprietary interests, such as confidential business information, techniques and relationships with clients.1 Prohibiting departing employees from engaging in directly competitive business within a reasonable area and for a reasonable timeframe is likely reasonable and valid, as this would enable the business owner to protect the relationships and goodwill they have developed with their clients and community. However, an attempt to prohibit departing employees from working in new areas of business that the employer has not yet started, is probably unreasonable (e.g., if the departing employee were to seek to open a clinic nearby and focus their practice on pelvic health and the employer did not offer these services).
Not excessive. “Canadian courts have consistently held that non-competition clauses are not appropriate when a non-solicitation clause will suffice to protect the employer’s interest.”4
Above all, restrictive covenants must use clear, unambiguous, understandable language. In KRG Insurance Brokers (Western) Inc. v. Shafron, the Supreme Court considered the scope of the non-competition clause covering “the metropolitan city of Vancouver.” The Court held the clause was too vague to be enforceable. Instead of trying to define acceptable parameters for the clause, the Supreme Court simply declared it unenforceable.1,4
In Specialized Property Evaluation Control Services Ltd v Les Evaluations Marc Bourret Appraisals Inc., the Alberta Court of Queen’s Bench held that while the non-competition clause was drafted clearly, the non-solicitation clause was overly broad and unenforceable. The fatal flaw was that the non-solicitation clause prevented the employee from doing “business” with any client of the employer. It was not limited to directly competitive business in which the employer had an actual proprietary interest.
Whether you are an employer hoping to protect your business with a restrictive covenant or an employee being asked to sign an agreement containing a restrictive covenant, it is important to negotiate the restrictive covenant carefully.
As an employer, consider the following:
Before using a restrictive covenant, consider what proprietary business interest you are trying to protect. What confidential business information or techniques do your employees have access to? Where do most of your clients come from? How often do you see them?
Consider if you need to prohibit departing employees from competing with you. Would your business be adequately protected if employees were simply prohibited from soliciting your clients and employees? Courts are usually more willing to enforce non-solicitation clauses than non-competition clauses. Don’t use a non-competition clause when a non-solicitation clause will do.1
If you use both non-compete and non-solicitation clauses, keep the two separate rather than combining them, to increase the likelihood that at least one will be enforceable.4
Impose the narrowest geographical and time parameters required to protect your business interests. If you choose too broad an area or too long a time, the courts could declare your restrictive covenant unenforceable.
Make sure the contract language is clear, precise and understandable to anyone who reads it. Include definitions for terms that might bear more than one interpretation.
Finally, consult a lawyer experienced in this area to help you prepare or refine your contracts.
As an employee or independent contractor, consider these tips:
When asked to sign a contract with a restrictive covenant, ask questions to understand the proprietary business interest, information, techniques or relationships the employer is attempting to protect. (e.g., where do most of the clients come from and how often do they attend for services?)
Compare this information to the restrictive covenant. Does the employer actually have a proprietary business interest to protect? Is there a geographical or time limit? If so are they reasonable for you to agree to?
Is the employer seeking a non-competition clause, a non-solicitation clause, or both? Would a non-solicitation clause on its own be adequate to protect the employer’s interests?
Is the language used clear, precise and understandable, or is it vague with more than one possible interpretation? Do you understand what you have to do to comply with the contract? If in doubt ask to clarify the employer’s intentions and suggest clarifications to the contractual language.
Finally, consult a lawyer to review the contract and help you negotiate changes if necessary.
Taking the time to consider these issues and to negotiate the least restrictive covenant that will still adequately protect the employer’s business benefits everyone. It will go a long way towards ensuring the contract is enforceable in accordance with what the parties, including you intended.
Hanson J. & Cohen S., Restrictive covenants in employment contracts: Canadian approach. Practical Law Multi-Jurisdictional Guide 2011/12. Available at: https://www.osler.com/uploadedFiles/Our_People/Profiles/H/Restrictive%20covenants%20in%20employment%20contracts.pdf Accessed December 17, 2018.
Wilkie J.W. Employment Law 101: Enforcement of restrictive covenants. Available at: http://www.mondaq.com/canada/x/477796/employment+litigation+tribunals/Employment+Law+101+Enforcement+Of+Restrictive+Covenants Accessed December 17, 2018.
Lambert K. Recent cases confirm obligations when holding former employees to non-competition covenants. McMillan Litigation Bulletin. Available at: https://mcmillan.ca/Files/196563_Recent_Cases_Confirm_Obligations_When_Holding_Former_Employees.pdf Accessed December 17, 2018.
Dinsdale H. & Goodman J., Restrictive covenants: Multiple jurisdictions create challenges. Canadian Lawyer, 2009. Available at: https://www.canadianlawyermag.com/article/restrictive-covenants-672/ Accessed December 17, 2018.
Sim, G.D. Practice Advice: some legal advice on employment contracts and non-competition clauses. College Callings 2009; 12(3):6-7.
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