Restrictive Covenants: An Employer Guide to Policies

The purpose of non-solicitation, non-competition, and confidentiality agreements, more commonly referred to as restrictive covenants, is to protect a company’s legitimate business interests. They are typically agreed upon at the commencement of employment and continue even after the employee departs.

Restrictive covenants are legally binding in Canada. However, depending on how they are drafted, non-competition and non-solicitation clauses may be unenforceable. This guide will look at the complications regarding restrictive covenants and the best practices for an employer to implement when utilizing them.

What are restrictive covenants?

A restrictive covenant is a contractual term of an employment contract that prevents an employee from engaging in certain activities during their employment or after the termination of the employment contract.

Employers deploy restrictive covenants for the purpose of protecting the business’ interests after the employment relationship has ended. Some examples of restrictive covenants are:

• Non-solicitation
• Non-competition
• Non-disparagement

What is a non-solicitation clause?

The purpose of a non-solicitation clause is to restrict the employee from soliciting customers, clients, staff, accounts, or vendors during or after their employment. Sometimes, an employee may quit and start a business that is the same or provide similar services as their former employer. To prevent an employee from poaching clients or staff, employers should require employees to sign a non-solicitation agreement. The easiest way to do this is by including the clause in the employment contract.

Are non-solicitation agreements enforceable?

The issue when it comes to non-solicitation agreements is whether they are enforceable or not. Generally, non-solicitation clauses are enforceable if they are clearly limited in terms of business activities, geographic scope, and time.

The seminal case of Elsley Estate v. JG Collins is the leading precedent to determine if a non-solicitation clause is enforceable. The Court considers:

• Did the employer have a proprietary interest entitled to protection? In other words, did the employer have a reason to protect something?
• Were the temporal or spatial features of the clause too broad? Did the clause cover too much time, or too large of a geographical area?
• Is the covenant’s scope too broad in the sense that it covers more than just non-solicitation?

To put it simply, to have an enforceable non-solicitation clause, it must be clear and not too restrictive on the employee making a living after leaving the business.

How to ensure a non-solicitation clause is reasonable

Employers should be careful when drafting a non-solicitation clause as it may be deemed unenforceable if it sounds like a non-competition clause. When drafting a clause, employers should take into account:

• What kind of information requires protection from a former employee?
• What is the duration of the clause after the employee is terminated?
• Is there any harm to the business if the employee solicits clients or employees?

What is a non-competition clause?

A non-competition clause restricts an individual from competing directly with the business during and after their departure. This may include opening their own competing business or working for a competitor.

An example of a non-competition agreement is an agreement that prohibits the employee from engaging in work that is in direct competition with the employer’s business for six months after the employment relationship ends.

The Courts have long confirmed that non-complete clauses are presumed unenforceable unless an employer can prove that they are reasonable in the circumstances.

There are numerous reasons why a non-competition agreement would be unreasonable, for example:

• The language is vague.
• The duration of the clause goes further than it needs to in respect of time and geographical location.
• The employer has not established a proprietary interest to warrant the protection.

Further to this presumption, Ontario has legislated a ban on non-competition agreements. As of October 25, 2021, the Ontario Employment Standards Act was amended to prohibit employers from entering into non-competition agreements with employees or former employees. However, this does not apply to non-competition agreements that were agreed to before October 25, 2021.

Other provinces have yet to legislate a ban on non-competition clauses, however, if an employer wants to enforce one in any other province than Ontario, it is important for them to clearly state the conditions of the clause or it may be deemed unenforceable.

What is a confidentiality agreement in the workplace?

A confidentiality agreement, sometimes referred to as a non-disclosure agreement, is an agreement between an employer and an employee that regulates the specific handling of a company’s proprietary information. The primary purpose of confidentiality agreements is to protect sensitive business information from being misused or exploited. This may include, but is not limited to:

• Any documents, records, files, media, or other resources.
• Security policies.
• Confidential client information.
• Trade secrets.
• Intellectual property.

A written confidentiality agreement between you and an employee will detail the confidential nature of the information being exchanged and state that it should not be used or shared externally for any reason, unless otherwise specified.

Do restrictive covenants apply to current or former employees?

It is best practice to have new employees agree to the restrictive covenants at the commencement of employment through the employment contract.

If restrictive covenant clauses are absent from the employment contract, you and the employee can amend the contract to add them in. However, employers should remember that amending an existing employment contract would require fresh consideration, such as additional pay.

For former employees, you and the employee may sign a restrictive covenant agreement through a full and final release or a settlement agreement. Similar to amending an existing employment agreement, employers must provide fresh consideration to their employees for signing a release or settlement agreement.

Can I terminate an employee for breaching a restrictive covenant?

This simple answer is yes. An employer can terminate an employee without cause for almost anything. However, the employee will still be entitled to notice of termination or pay in lieu as per the applicable employment standards legislation or common law.

However, for just cause terminations, the Courts are clear that the onus is on the employer to prove that a breach of a restrictive covenant agreement is so serious that it disentitles an employee from notice or pay in lieu.

What happens if a former employee breaches a restrictive covenant?

Sometimes, after an employee has resigned or was terminated, an employer discovers the employee soliciting clients or making bad remarks against the business. Employers who have an enforceable restrictive covenant agreement may seek relief by filing with the Court to get an order to stop the employee from breaching the agreement.

What if I have a termination provision in my restrictive covenant?

Many restrictive covenant clauses or agreements contain termination provisions; if an employee breaches the agreement, the employee can be terminated for cause. However, if the termination clause in a restrictive covenant agreement within an employment contract does not comply with the minimum requirements under employment standards legislation, the entire termination provision may be void.

The Courts have recently addressed this situation in Henderson v. Slavkin et al. where the employer relied on a termination provision in a restrictive covenant agreement that was unenforceable because it did not comply with employment standards legislation.

Essentially, the Court invoked the decision in Waksdale v. Swegon that if a termination provision in the employment contract does not comply with employment standards legislation, any termination provision in the employment contract is void and unenforceable.

It is imperative that employers who include restrictive covenant clauses in their employment contracts draft them clearly so they will not be rendered unenforceable while ensuring that any termination provision within the restrictive covenant agreement complies with employment standards legislation.

Do you need help drafting a restrictive covenant clause? 

Figuring out exactly what clauses to include in your employment contract can be complicated. If you have any questions about your employment contracts, talk to one of our experts.

Over the years, our advisors have drafted numerous customized employment contracts, helping identify any potential issues with wording and policies. To learn more about how our HR outsourcing services can benefit your business, call an expert today at 1 (833) 247-3652