At Goldstein Law, we are a Toronto-based law firm that focuses on employment law. In the course of our employment law practice in Ontario, we frequently consult employers and employees on the drafting of employment contracts and the interpretation of various terms contained in employment contracts. One of the recurring issues that we are retained to address is the enforceability of non-competition and non-solicitation clauses (also referred to as “restrictive covenants”). After you are terminated from your employment, the last thing you want to do is “sit on the bench” and wait for a non-compete period to expire or risk a lawsuit for breach of the contract.
Conversely, employers often require these terms in their employment contracts to (1) protect confidential information that employees accumulate through their tenure of employment from being distributed freely to competitors; and (2) prevent the terminated employee from seeking out previous clients of the former employer, or colleagues, to leave and join a new venture.
In this post, we will define the terms “non-compete” and “non-solicit” and discuss some of the relevant factors that will determine whether your clause would be enforceable based on the common law in Ontario. Further, we provide employees with some practical advice in the event they are terminated from their employment and their previous employment contract contains a non-compete or non-solicitation clause.
What Is A Non-Competition Clause?
A clause that restricts an employees ability to join a competitor company or form a new business in the same or similar line of business to their employers. An example of a non-competition covenant in an employment contract of an employee that was terminated without cause from a consumer electronics store was drafted as follows:
Should you leave X company for any reason you shall not for a period of 6 months after the termination of your employment, without written permission, directly or indirectly, engage in any undertaking or business as an employee, principal, agent, or consultant with a Competitor. A “Competitor” includes a retail business operation in Canada which has as its principal business the sale of X.
What is a Non-Solicitation Clause?
A clause in an employment agreement that restricts the employee from approaching former clients or colleauges of the employer to encourage them to leave for a new opportunity. An example from the same employment contract referenced above is as follows:
During the Restriction Period, you will not, directly or indirectly, contact, solicit or hire any employee, consultant, supplier or customer of X company, or assist any other person or business to do so, for the purpose of enticing the individual or entity to enter their relationship with X.
Is the Non-Competition and Non-Solicitation Clause Enforceable?
As a general rule, Courts in Ontario are loath to enforce these provisions in employment contracts as they act as a “restraint on trade.” In other words, the clauses act as a barrier to the former employee to earn income. As a result, the enforcement of non-competition clauses is especially difficult. A Court is more likely to enforce a non-solicitation clause, which is designed to prevent the employee from contacting former clients for a defined period of time – but does not act as wholesale prevention from carrying on business in their specialized area.
What Factors make Non-Competition and Non-Solicitation Clauses Enforceable
The more limited the geographic scope, the more likely the clause will be found enforceable. With the advent of social media, geographic restrictions are generally no longer found as pertinent to non-solicitation clauses, as prospective clients can easily be contacted online no matter where they reside.
Length of Restriction
There needs to be an end date for the provision. While each fact scenario is different, the shorter the restriction, the more likely it is to be enforceable.
Scope of Prohibited Activity
Some clauses may prohibit the employee from working for a defined list of competitors, or it may be worded so broadly to prevent the employee from working for any company in a large industry. The more narrowly drafted and defined the prohibited activity, the more likely the clause will be enforceable.
This post was drafted by Jeff Goldstein, principal lawyer at Goldstein Law. If you would like more information about employment contracts generally or non-competition or non-solicitation clauses specifically, feel free to reach out to firstname.lastname@example.org.