Restrictive Covenants in Employment Agreements
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Non-Solicitation and Non-Compete clauses are popular with employers who want to restrict their former employees from soliciting their clients or employees and/or competing for those same clients in the same area.
But employers should be careful when drafting these clauses, and ensure they do not over reach.
Courts are generally reluctant to uphold agreements that limit an employee’s ability to earn a living. Indeed, non-solicitation and non-compete clauses in employment contracts are presumptively unenforceable (unlike those in an agreement of purchase and sale). The Employer has a burden to prove that the clause is no more broad than is reasonably necessary to protect their legitimate business interests. If a clause is too broadly drafted, it will be unenforceable and the Courts will not read them down to fix it.
The good news is that it is possible to draft these clauses so that they are enforceable. Employers just have to draft them carefully and narrowly so that they protect no more than what is truly necessary. Generally speaking, non-solicitation clauses are often easier to enforce than non-competition clauses.
These are clauses that limit the former employee’s ability to work for a competitor or open a competing business. They are usually unenforceable, and are only upheld in exceptional circumstances.
When considering whether non-competition clauses are overly broad, a Court will consider things like:
- Would a non-solicitation clause have been sufficient to protect the employers legitimate business interests?
- Does the clause cover too broad of a territory? For example, does the clause restrict the employee from competing everywhere in the province when a 10 kilometer radius would have been sufficient?
- What role did the employee play in the organization and how close of a relationship do they have with the employers clients?
- How much of a market share does the employer have and how vulnerable would the employer be to competition?
- How much damage could a competing employee do in the same market as the employer?
- Does the clause cover too long of a period of time? For example, if the clause restricts competition for 2 years when 1 year would have been sufficient.
- Does the clause restrict too much activity? IE: does it prevent the employee from doing something which isn’t truly competitive
- Is it vague?
A non-solicitation clause allows a former employee to work for a competitor but prevents them from soliciting the clients or employees of their former employer for a certain period of time.
When considering whether non-solicitation clauses are overly broad, a Court will consider things like:
- Is there a proprietary interest to protect (ie: the clause may be too broad if the clients are shared with multiple players in the industry)
- Did the former employee have a close relationship or confidential information about all of the clients the clause seeks to protect?
- Does the clause restrict solicitation for too long of a period of time (ie: 12 months when 6 would have been reasonable)?
- Does the non-solicitation clause prevent the former employee from doing business with a client that contacts them (vs. the other way around) – this would effectively turn the non-solicitation clause into a non-competition clause.
The moral of the story is that employers should not get over zealous when drafting non-solicitation and non-competition clauses. These clauses are more likely to be enforceable when they are drafted narrowly.
Note that non-competition clauses in agreements for purchase and sale of a business are much more likely to be enforceable because the parties are more likely to have equal bargaining power and because the clause might be necessary to ensure the buyer’s newly acquired business is not subverted by the previous owners.
Tips when Drafting Restrictive Covenants
- Define what clients are covered by a non-solicitation agreement. For example, this could be clients the employee worked with on behalf of the employer in the last two years of employment.
- At the same time, make sure that it is not too narrow so a new covenant would be needed every time the employee starts to work with a new client.
- Use promotions and raises as an opportunity to update restrictive covenants and other terms in an employment contract.
- Consider your business cycle and how long it would take to re-establish relationships with key clients when considering time frames.
- Consider where your client base comes from and how much competition you have when considering geographical constraints in a non-competition agreement
- Avoid using language like “accept business from” in a non-solicitation clause.
All of the above constitutes legal information and not legal advice. For more information, advice or assistance about restrictive covenants in your specific workplace please contact me at email@example.com or 905-842-8030.