Restrictive Covenants In Employment Explained

Employment restrictive covenants are terms and conditions of employment (usually inserted in an employment contract) that restrict employees when they leave the employer. By way of example, a non-compete clause is a restrictive covenant that purports to prohibit employees from competing with their ex-employer for a set period after they resign or are terminated. 

Restrictive Covenants can sometimes serve a valid business purpose or be abused. On the one hand, businesses should be able to protect their interests from employees who might steal confidential information or clients to get a head start on a competing business. On the other hand, restrictive covenants can be abused by employers who, for example, without merit, threaten to counter-sue employees for breach of a restrictive covenant when they are sued for wrongful dismissal. For another example, some employers use restrictive covenants to silence victims and thus prolong a systematically toxic workplace (Harvey Weinstein was notorious for using confidentiality agreements).

What kind of employment restrictive covenants are there?

There are three kinds of employment restrictive covenants:

1. Non-competition clauses (also known as “non-competes”)
2. Non-solicitation clauses (also known as non-solicits)
3. Confidentially clauses (also known as non-disclosure agreements or NDAs)

(1) Non-Competition

A non-competition clause limits an employee from working for a competitor or going into business themselves in a competitive nature against their former employer.

Non-competition clauses are restraints of trade, meaning they restrict an individual’s ability to work. For this reason, courts were reluctant to enforce them.

In October 2021, the Government of Ontario introduced legislation that would make non-compete clauses illegal in Ontario. The only exception would be when a business owner sells his or her business and he or she becomes employed by the buyer. Therefore, in almost all circumstances, new non-competes will be illegal in Ontario when this legislation is passed. Whether or not a pre-existing non-competition clause will be legal or “grandfathered” will depend on the circumstances and the exact text of the new law. But, to be clear, chances are old non-competition clauses will be unenforceable and severed from any contract because the court will consider it an unreasonable restraint on trade. 

(2) Non-Solicitation

A non-solicitation clause limits an employee from taking or attempting to take the customers or employees of the employer. 

Many individuals with a sales position have a non-solicitation clause in their employment contract.

Like non-competition clauses, non-solicitation clauses are restraints of trade. However, unlike non-competition clauses, courts are more open to enforcing non-solicitation clauses to protect the valid business concerns of former employers. Moreover, the Ontario Government has not prohibited non-solicitation clauses, nor has it hinted that they would be in the future. 

Nevertheless, non-solicitation clauses still need to be carefully crafted. The non-solicitation clause should describe how it is necessary for the context of the business and the employee’s duties regarding it. Furthermore, the non-solicitation clause should only apply to customers/employees with which the employee already has a relationship. Finally, the non-solicitation clause should be limited reasonably in territory and time. 

(3) Confidentiality

All employees owe a duty of confidentiality to their employer. It does not matter whether an employee’s employment contract includes a clause protecting confidentiality; all employees have an implied duty, during and after employment, to protect confidential information or trade secrets they acquired during their employment. Confidential clauses differ from non-solicitation and non-compete clauses because confidentiality clauses are generally implied in each employment relationship, whereas non-solicitation and non-compete clauses are never implied. They must be explicitly included in the text of a contract.

Nevertheless, it is wise for many kinds of employers to craft their confidentiality clauses to protect their intellectual property rather than relying on the common law implied duty of confidentiality. In another blog post, I will discuss how to create enforceable confidentiality clauses that protect IP, trade secrets and clients. Such an endeavour needs its own article as it is quite complicated.

Another way that confidentiality clauses differ from non-solicitation and non-compete clauses is that courts are generally quite keen to enforce confidentiality clauses, especially regarding intellectual property. (Note: in the future, I predict courts will be reluctant to enforce sexual harassment confidentiality clauses or that legislatures will outright ban them like how Ontario banned non-compete clauses. Read more here). 

Conclusion

If you are a business in an industry that must protect against client poaching or intellectual property theft, use restrictive clauses like non-solicit and confidentiality clauses in your employment contracts. However, skip the non-compete clause. It is dead on arrival. Moreover, don’t make your non-solicit and confidentiality clauses overly broad restraints on trade. The courts will nix them.

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