In the fiercely competitive business landscape, companies often seek ways to protect their valuable assets, confidential information, and client base from being poached by former employees. A restrictive covenant is a legal tool that is commonly used in employment contracts to protect businesses after employees leave. Restrictive covenants can generally be found in one of three forms: non-disclosure, non-solicitation, and non-compete clauses. Sometimes their usage is a reasonable attempt to ensure the success of the business. In other scenarios, these provisions are deemed entirely unenforceable if they are too restrictive and impair an employee’s ability to work after leaving a company.
These three types of provisions are considered restrictive covenants which receive more scrutiny in employment contracts due to the imbalance of power between the employer and the employee. The law values free trade, which is represented by an employee’s ability to work for different employers. But the law also values freedom of contract, which is the ability to negotiate the terms of a contract without government interference. Restrictive covenants must reflect a fair balance between the two elements - Shafron v KRG Insurance Brokers (2009). The list below is organized by how likely a court is to uphold the Restrictive Covenant, from most to least.
1. Non-Disclosure Agreements
Limits an individual from disclosing information that the business has a proprietary interest in.
2. Non-Solicitation Agreements
Limits individuals from soliciting the company’s clients, customers, suppliers, or other employees for a specified period after leaving the company. This provision is designed to preserve the company’s network and personnel.
3. Non-Compete Agreements
Aims to prevent individuals from working for a competitor or starting a competing business for a specified period within a specific geographical area. This agreement is generally used for key employees who have access to sensitive information or trade secrets.
Enforcing Restrictive Covenants - Elsey v JG Colllins Insurance
Restrictive covenants must respect the factors below to be enforceable. If the provisions overreach, the court will not reduce the provision to something more reasonable, instead the court will strike out the provision and render it completely inoperative - Shafron v KRG Insurance Brokers (2009). This has the effect of leaving the business with no protection at all.
a) Legitimate Interest: The restriction must protect proprietary interests such as trade secrets, customer lists, or other proprietary advantages that could harm the company if disclosed to a competitor.
b) Duration, Geographic Scope, and Prohibited activities: The geographical boundaries, duration and the prohibited activities must be reasonable. What is reasonable is determined on a case-by-case basis.
c) Least Restrictive Option: The restriction must be the lightest possible restriction that would fulfill the goal of protecting the Legitimate interest. Typically, this means that there should be a valid reason to use something more than a non-disclosure agreement.
d) Unambiguous: The scope of the restriction must be clear and ascertainable. This means that vagueness will not be tolerated when the contract lays out the prohibited duration, geographic scope, and the prohibited activities.
Conclusion
Restrictive covenants are essential tools for businesses seeking to protect their interests. However, drafting these agreements requires careful consideration of the legitimate interests of both the employer and the employee. Employers must ensure that these agreements are reasonable to increase the likelihood of enforceability. Employees, on the other hand, should fully understand the implications of such agreements before signing them and seek legal counsel if needed.
In Ontario, the enforceability of these agreements varies, and courts carefully assess each case to strike a fair balance between protecting business’s and employees’ rights. Therefore, employers should take a cautious approach and tailor agreements to specific roles and responsibilities, while employees must be aware of their rights and the potential limitations imposed on them after leaving a company.
The information in this article has been provided for educational purposes only, while the information within has been evaluated for accuracy the concepts have been greatly simplified for the sake of brevity. If you need legal advice, please contact a lawyer.
Written by: Lucas Rotino
* Please note that the information in this article is not intended as legal advice, but rather as a general overview on the subject. If you are seeking legal advice, please consult with a lawyer.
