By Geoff Mason.
Some employers will include a non-competition or non-compete clause – aka a “restrictive covenant” – in an employee’s contract to restrict that employee’s ability to compete with the business if the employee ever quits or is fired. Put simply, a (properly-drafted) non-competition clause prevents an employee from doing a certain activity, in a certain geographic area, for a certain period of time.
While many employment contracts contain non-competition clauses, few of these are actually enforceable. This is because courts in Canada tend to view such clauses as unreasonable restraints on trade. In fact, when it comes to employment contracts, a non-compete clause is presumed to be unenforceable unless the employer can show that it is “reasonable between the parties and with reference to the public interest” (per the Supreme Court of Canada in Elsley v. J.G. Collins Insurance Agencies).
But what does this actually mean?
According to the BC Court of Appeal in Iris The Visual Group Western Canada Inc v. Park, whether a non-compete clause is reasonable and enforceable depends on the answers to these questions:
- Does the employer have a proprietary interest worthy of protection?
- If so, can that interest be protected by less restrictive measures than a non-competition clause?
- If not, is the non-competition clause reasonable when considering the prohibited activity, the geographic area that the restriction applies to, and the duration of the restriction?
Let’s look at each of these in turn.
Proprietary Interest to be Protected
The first step of this three-part analysis requires an employer to prove that the clause is protecting a bona fide (genuine) proprietary interest – at the very least, that it is protecting the employer from loss or hardship.
If there is no evidence that any such loss will result from the former employee engaging in the prohibited activity, the clause will likely fail this first step and therefore be unenforceable. Non-competition clauses frequently fail this part of the analysis for being overly broad.
Keep in mind that even if the employer shows that loss or hardship will result, the clause may still not satisfy this part of the analysis – the courts have recognized only certain types of interests as worthy of protection in employment contracts, including trade secrets, confidential information, and the employer’s trade connections.
Less Restrictive Modes of Protection
The second step considers what less-restrictive options were available to the employer. One alternative to a non-compete is a non-solicitation clause, which prevents a former employee from soliciting other employees or clients of the employer and is therefore more limited in scope. It would not, for example, stop an employee from operating a competing business, but could still protect the employer’s business interests (and be enforceable).
Scope of the Clause
If a court concludes that an employer has a legitimate proprietary interest worth protecting and there were no less-restrictive options available, then it will look at the reasonableness of the non-compete clause. This part of the analysis focuses on the geographic and temporal (i.e. duration) scope of the restriction.
Geographically speaking, a non-competition clause should not restrict an individual from engaging in activity in a location where the employer does not operate or where the restricted activity would not affect the employer’s business.
Temporally speaking, the clause should not restrict an individual from engaging in competitive behavior for an unreasonable amount of time. Current case law indicates that restrictions longer than one year after employment ends risk being unenforceable.
While some employers may be discouraged to hear that Canadian courts generally frown upon non-competition clauses, don’t lose hope. It’s still possible to protect yourself against an employee who tries to compete with your business when they leave. The key takeaway is that, when it comes to these clauses, less is more.
While it may seem like a good idea to draft a broad non-compete clause to ensure you’re completely protected, a clause that is overly broad will likely be unenforceable and of no use. On the other hand, a carefully tailored clause that restricts an employee’s activity no more than is necessary to protect your business interests will likely be enforceable – and most importantly, will still meet your needs as an employer.
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