Non-competition clauses: what you need to know
As an employee, you have access to information that is critical to your employer’s business. For example, you may be privy to information about your employer’s business plans, customer strategies, pricing, marketing tactics, or you may have a list (written or mental) of your employer’s actual customers and prospects. When you leave your job, whether to work with a competitor or to start your own company, this information and knowledge could be used to undermine your former employer’s operations. For this reason, your written contract of employment may include what is known as a ‘restrictive covenant’ to protect your former employer’s interests.
A restrictive covenant places limits on a former employee’s work-related activities after the employment relationship has ended. The most legally contested restrictive covenant is a non-competition clause, which prohibits an employee from setting up a new company or working in a competing company within a certain timeframe or geographic area following the end of employment.
While many employers attempt to rely on a non-competition clause to limit a former employee’s post-employment activities, legally enforcing this clause is a different story altogether.
First, to be enforceable, a non-competition must be explicitly written into a contract of employment. A non-competition obligation can never be an implied duty in the employment relationship: if an employment contract does not include a non-competition clause, an employer cannot legally enforce this clause against an employee.
Second, even if a non-competition clause is included in the employment contract, the clause cannot serve to stifle competition or limit an employee’s ability to earn a living carrying out his or her livelihood. Canadian laws are not interested in creating monopolies and including a limitation that makes it virtually impossible for a former employee to work will make the non-competition clause legally unenforceable.
Third, the non-competition clause must relate to a business interest of the employer that requires protection and cannot go beyond what is reasonable and necessary to protect the employer. So, for example, rather than prohibit a former employee from working with all competitors in a certain industry, the clause could be written to prohibit employment with a smaller number of direct competitors (e.g. A Coke employee cannot leave and work for Pepsi, but she would be free to work with other beverage companies).
Finally, a non-competition clause must be reasonable as to the geographical area and the timeframe for which it operates. Canadian courts tend not to enforce non-competition clauses which have a duration longer than two (2) years. Further, the greater the correlation between the geographical area where the employer draws it clients, the more likely that the non-competition clause will be enforced in this area.
If you want to determine whether the non-competition clause in your contract is enforceable, consider the following:
- Does it restrict you from working within a limited, reasonable geographical area?
- Does the clause mention specific businesses that you are restricted from working with or for?
- Does the clause aim to restrict you from non-competing for a limited duration of time?
- Did you hold a key role in the management, operations, or direction of your former employer?
- Was the non-competition clause included as part of contract from a sale of a business owned or managed by you?
If you answered ‘Yes’ to most of these questions, then your employer may have a better chance of enforcing the non-competition clause found in your contract.
Of course, the surest way to determine whether a non-competition clause is legally enforceable is to consult with an employment lawyer. If you or someone you know needs assistance to determine the enforceability of a post-employment restriction, contact us to schedule a consultation – we would be pleased to help!