Restrictive Covenants

Restrictive covenants are clauses in contracts that are meant to protect the employer in the event that the employee leaves his or her position or has to be dismissed. The two most common restrictive covenants are non-competition clauses and non-solicitation clauses.

The purpose of a non-competition clause is to prevent an former employee from competing with the business of the employer. An example would be a clause that prevents a former employee from starting and operating a similar business within a certain distance of the former employer’s business location and for a certain period of time, perhaps two years.

The purpose of a non-solicitation clause is to prevent a former employee from soliciting the business of the former employer, the former employer’s employees, or business with the suppliers of the former employer. This kind of clause may also have certain parameters such as an applicable period of time

Although an employer can be creative with the kind of restrictive covenants that are included in its contracts, all such clauses are ultimately subject to review by the Court. A restrictive covenant cannot be unreasonable in scope or duration.

In fact, the Courts have ruled that any restrictive covenant has to be designed to protect the legitimate business interest of the employer. Specifically, the restrictive covenant cannot be overly onerous on the employee. Courts typically favour a non-solicitation clause over a non-competitation clause as it interferes less with the former employee’s ability to earn a living in the future.

As an example, a restrictive covenant that limits an employee’s ability to work or compete in the same city for an indefinite period of time will likely not be upheld by the Court. The more precise a restrictive covenant is and the more limiting its words are, the more likely it is that it will be enforced.

The following are some factors to consider when implementing restrictive covenants or less stringent alternatives to restrictive covenants:

1. They should possibly allow competition but create an agreed financial damange sum to be repaid. This will be effective as long as the damage sums are genuine and realistic and must still pass the test of a restrictive covenant.

2. They should create a form of contingent compensation that the employee will earn over a fixed time period while employed, or attach the earning of this sum to compliance with an greed notice period from the employee to the company. The compensation must not be earned, but rather be earned over the relevant time. This term will not be considered a resctictive covenant. The sum must not be earned income because the convenant would likely be construed as a penalty clause and will be unenforceable.

3. In a variation on the contingent competition covenant, pay deferred contingent compensation pending compliance with the non-competition or non-solicitation clauses.

4. Attach the non-solicitation clause, which is preferable to a non-competition clause, to the payment of an agreed severance over time to ensure compliance with the non-solicitation clause.

5. Contract for an enforce a notice obligation from the employee to the company independent of any other covenants.

The above is not an exhaustive list and business can be creative when it comes to the kinds of restrictive covenants that may be included in their employment contracts.

Ken has co-authored a book on employment contracts called The Written Contract of Employment. To learn more click here.

“Whether you are just beginning your career in workplace law; practise it day in, day out, or only summarily; or are responsible for managing human resources for your employer, it is critically important that your strategy be guided by Harris and Alexander’s Written Contract of Employment.”

– Peter Israel, B.A., L.L.B.

The information on this website is for informative purposes only. It is not legal advice. A lawyer can only be retained after a consultation. If you need a wrongful dismissal lawyer or if you have any other employment law issues, call Ken at: 416 323 3614