All employees in Canada, regardless of the stature or status of their employment, are subject to a duty of good faith in their employment. This duty entails that the employee honours their employment contract and deals with their employer honestly and forthrightly. However, some employees are subject to further duties in their employment, such as enhanced duties of confidentiality or fiduciary duties. Such duties are typically imposed upon employees who enjoy a high employment stature that necessitates further restrictions on their employment. Such further restrictions often include the incorporation of restrictive covenants in employment contracts applicable to such employees.
Restrictive covenants are clauses in employment contracts that prevent employees from engaging in certain behaviours post-employment with their employer. In particular, restrictive covenants typically encompass non-competition clauses, which dictate that an employee may not accept employment with any employer who directly competes with the former employer, and non-solicitation clauses, which govern an employee’s ability to solicit clients or employees on behalf of a new employer.
This blog explores restrictive covenants in employment, including when they are permissible, the scope such clauses are legally allowed to encompass, and their enforceability.
Employee Quits Job to Work for Client of Former Employer
The recent Ontario Superior Court of Justice decision in Boaden Catering Limited v Earl Haig Community Day Care provides excellent insights into the operation of restrictive covenants in employment. The case involved an executive chef who had worked for the plaintiff’s catering company for approximately eight years until he resigned to accept employment as the head chef of a daycare. The daycare in question had been a client of the plaintiff catering company, but upon hiring their new head chef, they terminated their contract with the catering company.
Employer Sues Former Employee, Alleges Violation of Restrictive Covenants
Following their chef’s departure from the company to work for a catering company client and the subsequent severing of the contractual relationship between that client and the catering company, the catering company sued its former executive chef on a number of grounds, including allegations that he had inappropriately violated the non-competition and non-solicitation clauses of his employment contract. The employer sought $450,000 in damages for the various contractual breaches it alleged its former employee had undertaken.
Restrictive Covenants in Employment
Restrictive covenants are known in the legal world as covenants in restraint of trade in that such clauses restrain or otherwise restrict the behaviour of employees. They are limited regarding the employment options they may undertake following departure from the position subject to such covenant. Because restraint of any free person’s behaviour is generally frowned upon, courts are reluctant to find such clauses legally viable unless certain criteria are satisfied.
Generally speaking, restrictive covenants are only considered valid and enforceable if they are found by the courts to be reasonable. This means that the court will review any impugned restrictive covenant to ensure that the scope of the behaviour purportedly restrained is reasonable concerning duration, geography and type of behaviour restricted. The burden of proving reasonableness rests with the party who seeks to enforce the restrictive covenant (typically, but not always, the employer).
Legality and Viability of Non-Competition Clauses
Non-competition clauses must, as indicated above, be reasonable if they are to be considered enforceable. In respect of non-competition clauses in particular, the employer must demonstrate, on the balance of probabilities (i.e., to a certainty of 51 per cent), that the imposition of a non-competition clause is necessary to protect the employer’s business interests. If the employer cannot surpass this hurdle, then the court will not even bother reviewing whether the clause is reasonable.
If the employer demonstrates that the imposition of a non-competition clause is necessary to protect the employer’s business interests, only then will the court review the clause to ascertain whether it is reasonable for scope regarding geography, type of behaviour restrained and duration. To that end, the broader the type of behaviour restrained and the wider the geographic scope, the more difficult it is for an employer to prove the restraint necessary and reasonable. Similarly, the longer the duration of a non-competition covenant, the more likely it will be found by the courts to be unreasonable.
Viability and Legality of Non-Solicitation Covenants
As with non-competition clauses, non-solicitation covenants are generally unenforceable unless they can be demonstrated to be reasonable between the parties concerning duration, geographic scope and types of behaviour/clients limited by the covenant.
Also similar to non-competition clauses, non-solicitation clauses will only be upheld as valid and enforceable in circumstances in which the employer can demonstrate, on the balance of probabilities (i.e., to a certainty of 51%), that the scope of the covenant is reasonable in terms of duration, scope and types of behaviour restrained. The longer the duration of such a covenant and the broader its geographic scope, the more unlikely that the employer will be able to prove such a covenant is reasonable and enforceable.
Necessity, Validity and Enforceability of the Restrictive Covenants in this Case
In this case, the court carefully reviewed the non-competition clause in the chef’s contract. It noted that the catering company failed to provide evidence that it had a proprietary interest in its client base that required protection via a non-competition agreement. Moreover, the geographic and temporal scope of the covenant was unreasonable in that it purported to prevent the chef from working within a 100-mile radius of the catering company for a duration of 24 months following termination of employment with the catering company. Given that the catering company only operated in a relatively small geographic area of the Greater Toronto Area, there was no need to restrain the chef from working within a 100-mile radius. Furthermore, the clause itself was ambiguous for several reasons, including because it referenced miles when Canada is a metric country that typically references distances in kilometres. For these reasons, the court was satisfied that the non-competition clause was ambiguous, unreasonable and thus unenforceable.
Turning to the non-solicitation clause, the court thoroughly reviewed the impugned clause. It determined that the purported restraint of the chef from soliciting any clients, employees or agents of the catering company within a 100-mile radius of the catering company for a duration of two years was unreasonable. The unreasonableness of the non-solicitation clause was rooted in the same logic that the court relied upon to find the non-competition clause unreasonable- namely, that the scope of the clause was overly broad and ambiguous and was therefore unreasonable and unenforceable.
As a result, the court determined that neither the non-competition nor the non-solicitation covenant was reasonable or enforceable in the circumstances.
Contact Haynes Law Firm in Toronto For Employment Contract Review and Negotiation
If your employment contract includes restrictive covenants like non-compete or non-solicitation clauses, you need legal guidance to understand your rights and responsibilities. Haynes Law Firm can help. Paulette Haynes represents employees in employment contract disputes, both during and after employment. Call (416) 593-2731 or visit us online to schedule a confidential consultation.
