Top 10 Issues for Employers, #2: Restrictive Covenants in Canada
This is the second instalment in our Top 10 Issues for Employers series. This issue addresses some common questions clients have about restrictive covenants.
Post-employment restrictive covenants are contractual terms designed to protect a business from competition by a former employee that could harm the business. In the absence of contractual restrictive covenants, former employees — except fiduciary employees — are free to compete with their former employer, provided that confidential information of the former employer is not used. The following are some of the most common questions we receive regarding restrictive covenants.
Are Post-Employment Restrictive Covenants Enforceable in Canada?
Yes, but Canadian courts will not enforce restrictive covenants that unnecessarily restrict an employee’s freedom to earn a livelihood after the end of an employment relationship. A former employer must demonstrate to the court’s satisfaction that the scope of the covenant is “reasonably necessary” for the protection of the business. What is “reasonably necessary” depends on the nature of the business, its geographic reach, and the former employee’s role and responsibilities in that business. Additionally, in Quebec, the Civil Code provides that a non-competition clause will not be enforceable if the employer terminates an employee’s employment without cause.
What Are the Differences Between a Non-Competition Covenant and a Non-Solicitation Covenant?
While the generic term “non-compete” is often used to describe either or both non-competition covenants and non-solicitation covenants, the two covenants serve different purposes. A non-competition covenant prohibits a former employee from becoming engaged in a business that competes with the business of his or her former employer. A non-solicitation covenant prohibits a former employee from soliciting the customers or employees of his or her former employer. However, sometimes the line between the two types of covenants is blurred by “no-deal” provisions, which restrict employees from having dealings with customers even absent solicitation.
Which Type of Covenant Is Most Likely to Be Enforced?
A non-solicitation covenant. Canadian courts will only enforce non-competition covenants in “exceptional” circumstances, for example, where an employee is essentially the “face” of an employer’s business to its customers, such that those customers would follow that employee to a competitor after termination of the employment relationship, even if they were not solicited by the former employee.
In the absence of exceptional circumstances, courts typically find that non-solicitation covenants provide adequate protection to an employer’s business interests and will accordingly refuse to enforce non-competition covenants on the basis that they are not commercially necessary.
What Are Best Practices for Drafting Non-Competition Covenants?
A non-competition covenant should only prohibit an employee from becoming engaged in business activities that are the same as or similar to the activities the employee was engaged in at the time of termination. For example, a non-competition covenant that prohibits a former employee from working for a competitor even in a non-competing line of business or in a completely different role will not ordinarily be enforced.
A non-competition covenant should have a geographic scope no broader than the areas in which an employer is vulnerable as a consequence of the employee’s departure. A covenant with no geographic scope or a worldwide geographic scope will not be enforced by a Canadian court. Generally, limiting the covenant to the specific geographic areas in which an employee actually performed services on behalf of the business is advisable.
A non-competition covenant should last no longer than is necessary for an employer to regain any competitive advantage lost when an employee departs. Courts will not enforce a restrictive covenant that does not contain any time limit. Courts will consider evidence about the company’s business (e.g., information about sales cycles, contract renewal periods, and the time it will take to replace a key employee) to determine what time period is reasonable. In general, non-competition covenants with durations of 12 months or less are more likely to be enforced by a Canadian court than longer covenants, although longer covenants may still be appropriate for senior executives.
What Are Best Practices for Drafting Non-Solicitation Covenants?
Non-solicitation covenants should only cover solicitation of existing customers or prospective customers with whom the employee had a business relationship at the time of termination or in a relevant time window prior to that date.
Only solicitation on behalf of a competitive business should be prohibited by a non-solicitation covenant (i.e., it is not reasonable to prohibit the solicitation of customers where such solicitation would not result in a reduction in the company’s business).
Restrictions on employee solicitation in a non-solicitation covenant should only cover employees with whom the employee had contact (i.e., not all employees of a global company).
The restrictions on non-solicitation should also be for a limited time period, with a duration of 12 months being the most common.
Is Blue Pencilling Permitted in Canada?
No. Canadian courts will not “blue pencil” or read down restrictive covenants that contain overbroad provisions to render those covenants enforceable. This is the principal reason why it is important to tailor restrictive covenants to the specific employee, position and business, and draft the restrictions narrowly.
For more information, please contact any member of our Employment & Labour group.
Posted in: Employment & Labour
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