Restrictive covenants: When will non-competes and non-solicits in employment agreements be enforceable?
By Jane Scholes
Many employment contracts include an agreement that, for some period of time following their employment, the employee will not work for a competitor or solicit business from the company’s customers and/or suppliers. These belong to a category of clauses called “restrictive covenants”, so named because they attempt to restrict an employee’s post-employment conduct. They are also sometimes referred to as “non-competes” or “non-solicits”.
These clauses can cause headaches at the end of an employment relationship, either for the employee or the employer, depending on how well the clause was drafted.
For employees, a restrictive covenant could interfere with their plans for what’s next in their career when leaving their job and expose them to a lawsuit by their former employer. Many employees forget their employment agreement even included a restrictive covenant. Other than those making a drastic career move, many employees leaving a job (voluntarily or after being terminated) might take steps that would breach such a clause as they would want to make a move to a company in the same field or industry, due to their skills, experience and industry contacts.
For employers, restrictive covenants protect them from employees who, with the benefit of all their training and experience, intimate knowledge about the employer, and established relationships with customers and suppliers, might seamlessly transition to a competitor, possibly taking the employer’s customers or suppliers with them. Many employers include boilerplate, broad restrictive covenants in employment agreements, thinking they will be protected.
Fortunately for employees, and unfortunately for employers, restrictive covenants have long been viewed skeptically by Courts in Ontario. Unless the restrictive covenants are very carefully and narrowly drafted, they are often deemed invalid. To be enforceable, the covenants must be reasonable between the parties and with reference to the public interest; it must be appropriately narrow in scope, duration, and geography. The nature of the employer’s interest and the importance of the employee to the employer’s organization will also be considered in deciding whether it is a valid restriction on the employee. Non-solicits are easier to enforce than non-competes, because they are more limited in terms of the scope of activity they seek to restrict.
Despite being difficult to draft properly, a well-drafted restrictive covenant will be a powerful tool for employers and deterrent for employees. On May 1, 2018, the Ontario Court of Appeal released its decision in MD Physician Services Inc. v Wisniewski, 2018 ONCA 440, upholding the decision of a trial judge who found two former employees liable for breach of a reasonable (and therefore enforceable) non-solicitation clause. The clause in question read as follows:
Non-Solicitation. The Employee agrees that the Employee shall not solicit during the Employee's employment with the Employer and for the period ending two (2) years after the termination of his/her employment, regardless of how that termination should occur, within the geographic area within which s/he provided services to the Employer.
"Solicit" means: to solicit, or attempt to solicit, the business of any client, or prospective client, of the Employer who was serviced or solicited by the Employee during his/her employment with the Employee.
The former employees, who were financial advisors, gave their new employer a list of clients they had serviced with their former employer, and called those clients. At trial, the former employees argued that the calls were “courtesy calls”, and that the non-solicits in their employment contract were ambiguous and unenforceable. The Court of Appeal rejected the employees’ arguments, finding that they were clearly trying to bring the clients to the new employer in breach of the appropriately circumscribed non-solicit in their employment agreements. The new employer was also found to be vicariously liable for the employees’ breaches.
This case is a cautionary tale for employees and employers. Employees with restrictive covenants in their employment agreements should get legal advice about their enforceability, particularly before making a career move that may be offside the terms. Employers taking on the former employees of competitors should be careful before allowing their new employees to approach or contact clients of their competitor.
Employers should carefully consider whether they need to protect their interests with restrictive covenants in employment agreements, and, if so, get legal advice to make sure the terms will be enforceable.