Sep 19

Restrictive Covenants in the Workplace, Toronto Employment Lawyer

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Restrictive covenants, also referred to as restraint of trade clauses, are terms in an employment contract which seek to limit an employee’s ability to freely work and earn income from other sources other than the company during and after employment. Typically, these clauses present themselves as non-competition and non-solicitation clauses. The operability of these clauses is highly contextual, and based on a set of principles developed by judges. While these clauses can show up in other types of relationships, for instance in the sale of a business, in the employment context the determination as to whether the clause is valid is coloured by the general principle that there is an imbalance of power in the employment relationship. 

The Test:

In recognition of the imbalance of power, and in an effort to encourage free economic trade, restrictive covenants are prima facie invalid in the eyes of the Court, unless the party seeking to rely on the covenant can satisfy the following test:

1.Is the restraint reasonable between the parties to the covenant in that it goes no further than protecting the employer’s interests?

2.Is the restraint reasonable in the public interest?

3.Does the employer have an interest deserving of protection? (W.R. Gale and B.A. Grosman Q.E., “The Enforceability of Written Employment Contracts and the Termination of Probationary Employees” (1988) Institute of Continuing Legal Education.)

The clauses will often be analyzed for reasonable with respect to geography:

For non-solicitation clauses there may not be a requirement to define geography, given that they tend to only limit a departing employee’s ability to solicit the company’s clients,  non-competition clauses, however, must be very clearly defined with respect to the area in which the employee is limited. (Bratton v Crews, Cummings Group Inc. v Sinnige, [1988] O.J. No. 2363; TCT Logistics Inc v Nordeen, [1999] B.C.J. No. 2318; Safron v KRG Insurance Brokers (Western) Inc., (2009), 301 D.L.R. (4th), 522 SCC 9.)

The clauses will also be analysed with respect to how long the employee is limited for:

Courts are generally more inclined to rule that a restraint of trade clauses is unreasonable if the term exceeds 2 years, however this is also highly contextual and will greatly change from situation to situation. 

The clauses must also be reasonable in the types of activities they are limited:

The nature of the prohibited activities must also be legitimate, clearly defined and determinable by the parties. An employer is only entitled to protection of a legitimate interest, which traditionally has been prescribed as trade secrets and confidential information. 

There is no legitimate business interest to protect merely because an employee may have learned generic and general information about the company.(see: Hebert Morris, Ltd v Saxelby, [1916] AC 688)

Conclusion:

The onus is on the employer, or the party relying on the restrictive covenant to prove that the clause is reasonable and protects a legitimate interest. Typically the Court looks to the circumstances that exist at the time the restrictive covenant was made, instead of when the issue arises. Once that burden is discharged the onus then shifts to the employee to establish that the clause is contrary to public interest and/or unreasonable, in order to render the clause unenforceable (see: Esso Petroleum Co. v Harper’s Garage (Stourport) Ltd., [1967] 1 ALL ER 699 (H.L.), Herbert Morris, Ltd v Saxelby, at pp. 700 and 707-708.)

If you are an employer or employee and you have questions about restraint of trade clauses and their enforceability you should talk to an employment lawyer. Contact Monkhouse law today for a free 30-minute consultation to discuss what may be reasonable in your specific case.

 

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