It is a commonplace for employers to include restrictive covenants in employment contracts in order to try and protect their business from future competition should the employee. Restrictive covenants are non-competition and non-solicitation clauses. These types of provisions are meant to set limitations on an employee’s ability to compete unfairly with the previous employer.
What are Non-Competition and Non-Solicitation Clauses?
A non-compete clause is used by an employer to stop an employee from working with its competitors after the employment relationship has been terminated by either party. A non-solicitation clause prevents former employees from reaching out to their former employer’s clients and trying to conduct business with them.
Both types of clauses are actually considered unenforceable for being too restrictive and anti-competition. However, both can be enforced if they can protect the employer while infringing as little as possible on an employee’s rights. Of the two, non-solicitation clauses are more likely to be considered reasonably limited in its restrictiveness if drafted properly. For this reason, non-solicitation clauses are preferable to employers.
Employers may word non-compete clauses as non-solicitation clauses (intentionally or unintentionally). The provision may be under the heading of non-solicitation in an employment contract, yet the language of the clause could prohibit competition too generally. Thus, it would be considered a non-compete clause and is highly unlikely to be enforceable.
Court of Appeal Decision: Donaldson Travel Inc. v. Murphy, 2016 ONCA 649
The employee in this decision left her travel agency (former employer) for a new travel agency (new employer). These travel agencies were competitors. The employment contract with the former employer stated:
“[The Employee] agrees that in the event of termination or resignation that she will not solicit or accept business from any corporate accounts or customers that are serviced by [the Employer], directly or indirectly.”
The former employer claimed that the employee was in breach of the employment contract’s non-solicitation clause.
While at first glance, this may seem like a non-solicitation clause, the trial judge held the provision to be unreasonable and unenforceable. The judge found it to effectively be a non-compete clause which was not warranted to protect the former employer’s proprietary interests reasonably. Moreover, there was no temporal limitation in the restrictive covenant’s language, nor was it narrow in scope.
The employee was not just barred from soliciting clients from the former employer but also could not accept business with the clients regardless of what type of business was involved or if the employee even had any contact or involvement with them at their previous job. Essentially, the non-compete (masquerading as a non-solicitation clause) was not allowing the employee to deal with any of the clients, even if it was completely unrelated to the former employer’s business.
The Court of Appeal agreed with the trial judge’s decision. There was no error made with regard to the finding that the restrictive covenant was an unenforceable, non-competition clause.
What does this Mean for You?
Employers and employees should understand that the restrictive covenants included in employment agreements are considered unenforceable unless they can show it is reasonably restrictive.
If a non-compete or non-solicitation clause is in the contract, the employer should ensure it is as narrow in scope as possible, which may allow for a court to decide it is sufficiently restrictive to protect the employer’s proprietary interests without infringing on an employee’s rights excessively. However, employers should also understand that the most well-drafted non-competition clauses are still only enforceable in limited circumstances. If an employer then tries to hide a non-compete as a non-solicitation provision, that is highly likely to be considered unenforceable by the courts.