Restrictive Covenants in Employment Contracts (Updated Oct 28 2021)

restrictive covenants in employment contracts

It happens all too often: an employee is terminated, finds the perfect new job in the industry, and then is notified by their past employer that they are breaking a non-competition, non-solicitation, or confidentiality clause in their past employment contract. These provisions, which all fall under the umbrella of “restrictive covenants” and are also known as “restraint of trade clauses,” can be intimidating, complicated, and a very real barrier to employment.

If your employment contract contains a restrictive covenant, it can have significant repercussions on the work you can obtain after your employment relationship ends. These clauses usually purport to restrict an employee from working in certain geographical areas or areas of employment upon completion of their employment relationship.  In other cases, employment contracts may include clauses stipulating that past-employees can compete against the employer directly after termination, but at a cost. We have more detailed information about provisions called penalty clauses or liquidated damages provisions.

Although such clauses may seem daunting, Canadian courts are unlikely to uphold punishing contractual agreements that limit an employee’s ability to pursue their livelihood. Employers still often include unenforceable restrictive covenants in employment contracts though, often in the hopes that employees will simply comply.

On October 25, 2021, the Ontario government introduced Bill 27, Working for Workers Act, 2021. The proposed legislation aims to better protect, support, and attract workers to Ontario. The bill passed the first reading in the Legislative Assembly of Ontario on October 25, 2021. If passed, the new legislation will amend the Employment Standard Acts to prohibit employers from using non-compete agreements. However, the new legislation will continue to allow purchaser and seller to enter into an agreement that prohibits the seller from engaging in any business, work, occupation, profession, project or other activity that is in competition with the purchaser’s business after the sale. 

So, is your restrictive covenant enforceable? Do you really have to pass over that new employment opportunity?  How do you get around that non-solicitation clause? Read on to find out.

Is my restrictive covenant legal?

Ontario courts consider a variety of factors when assessing restrictive covenants (you can read more about these factors).  In general, any type of restrictive covenant must be sufficiently clear so that the parties understand what precisely they are agreeing to. It must be necessary to protect the employer’s legitimate interests and must therefore be limited in its restrictions. A restrictive covenant that states, for example, that you can never work in the industry again is almost certainly unenforceable and of no force and effect. For example, there is currently a prohibition in Ontario on temporary help employees being prevented from accepting employment with the client company.

Whether your restrictive covenant is enforceable depends on exactly how restrictive it is; generally, the more harsh the agreement, the less likely it is to stand up in court. Where exactly the line is drawn between an aggressive restrictive covenant and an unenforceable restrictive covenant depends on the type of clause it is, the particular circumstances, and the language of the contract.

There are three types of restrictive covenants in employment contracts: non-competition clauses, non-solicitation clauses, and confidentiality clauses. Each type of restrictive covenants has different restrictions that can render it unenforceable. Read on to find out which one applies to you and whether it might be invalid.

(1) Non-Competition Clauses

Non-competition clauses protect an employer’s legitimate business interest by preventing a former employee from talking or working with competitors or using any employer-specific product information, knowledge of customers, or business opportunities to their own advantage. Such clauses are generally not upheld by courts because they are too severe. As a result, the onus is on the employer to prove that it actually is enforceable.

In order for a non-competition clause to be enforceable, an employer must demonstrate:

  • that they have a proprietary interest entitled to protection;
  • that the timeframe and geographical scope provisions of the clause are not overly broad; and
  • that the covenant is limiting only solicitation of former clients and is not, in reality, limiting competition generally.

In considering any restrictive covenant, the courts must balance the legitimate needs of the employer to protect their business with the need of the employee to find gainful employment. Because of the particularly strict nature of non-competition clauses, the courts typically consider such contracts to be overly restrictive and onerous for employees. So, if a less restrictive clause (such as a non-solicitation clause) is sufficient to protect the employer’s interests, the non-competition will not be upheld and is legally invalid.

(2) Non-Solicitation Clauses

Non-solicitation clauses prohibit employees from approaching their former employer’s customers, clients, or employees. To be found enforceable, these cannot prohibit a former employer’s customers and/or employees from approaching the former employee without solicitation. So, under non-solicitation clauses, if a client of your former employer approaches you of your own accord, the restrictive covenant has not been violated.

Ontario courts are generally more willing to uphold non-solicitation clauses. They are viewed to more effectively balance the needs of the employer to protect their interests with the need of an employee to remain in their line of work and use their skills and experience. As a result, these are often upheld in court.

(3) Confidentiality and Ownership of Company Property

Certain restrictive covenants protect only the confidentiality and ownership of company property. Generally, confidential information of an employer remains confidential permanently, even after an employee has left their employer, regardless of the presence of any such agreement. So, even without a confidentiality provision in an employment contract, you may still owe a duty not to disclose the confidential information of your former employer, and this duty may go on indefinitely.

Confidentiality clauses are generally upheld by courts if the employer can show:

  • that the information disclosed or used by the former employee had the quality of confidence, meaning the employee was told the information was confidential;
  • the information was given to the employee in circumstances of obligation of confidentiality; and
  • the unauthorized use of the confidential information caused damage to the employer.

There is one exception to confidentiality clauses, and that is if a confidentiality agreement attempts to limit an employee’s ability to use skills that they developed in the workplace. An employee has the right to use and transfer skills that they nurtured while working for former employers, rendering clauses that purport to restrict that right unenforceable.

What if I violate my restrictive covenant?

The consequences of violating a legally binding restrictive covenant depend on the restrictive covenant itself. The onus lies on the employer to enforce the clause. An employer who sees that a former employee is violating the terms of the restrictive covenant may try to sue for damages and ask the courts for an injunction wherein the courts enforce the clause and order you to comply with its restrictions. Alternatively, if the clause contains a remedies section setting out what damages the employer is entitled to upon violation of the agreement, the employer could ask the courts to enforce that provision.

The consequences of ignoring a non-compete are serious; therefore, it’s better to get out ahead and determine beforehand whether the clause is enforceable.

How do I get out of my non-compete or restrictive covenant?

As previously discussed, many restrictive covenants — in particular, most non-competes — are not actually legally binding, as they may be overly broad, not actually protect an employer’s interests, or impose unreasonable restrictions on a former employee. Despite this potential for invalidity, some restrictive covenants are, in fact, enforceable.  These are legally binding, just as any other contract is. For this reason, employers can seek significant remedies, such as monetary damages and injunctions, if they are violated. The best way to try to get around a non-compete or restrictive covenant is therefore to consult with a legal professional to get an assessment of whether your contract is binding and what steps to take to both protect yourself and seeking job opportunities that are the best fit for you.

What should I do?

Restrictive covenants must strike an appropriate balance between protecting the employer’s business and the interests of the employee for working and obtaining gainful employment. Although your restrictive covenant may seem foolproof, courts are unlikely to be sympathetic to employers with overly strict clauses.

If you have been terminated and are having trouble determining the next steps because of a restrictive covenant in your employment contract, seeing an experienced employment lawyer at Monkhouse Law is the best way to ensure that you are not opening yourself to legal liability whilst pursuing your employment interests going forward.  If you’re grappling with a restrictive covenant, give us a call for a free 30 minutes consultation.

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