Legality of Restrictive Clauses in Separation Agreements
Separation agreements play a crucial role in understanding the terms of an employment relationship, offering compensation, expectations and outlining terms of departure. However, these agreements can sometimes include restrictive clauses that raise legal questions. Recent developments, particularly in the context of a recent review Meta’s separation agreements, have highlighted the complexities of these clauses. Why is Meta’s restrictive clause unlawful? This blog explores the legality of restrictive clauses in separation agreements, focusing on Meta’s recent case and examining it through the lens of Ontario law.
Why is Meta’s Restrictive Clause Unlawful?
In July 2024, a US National Labor Relations Board (NLRB) administrative law judge decided that Meta, a leading technology company, implemented restrictive clauses in its separation agreements during a round of layoffs. The clauses in question included non-compete and non-solicitation provisions, which sparked considerable debate.
Meta’s approach involved extensive non-disparagement and confidentiality provisions. These clauses aimed to protect Meta’s business interests and intellectual property, but they raised concerns about their fairness and enforceability.
The controversy centered on whether these restrictive clauses were reasonable and proportionate. Critics argued that such clauses could unduly hinder employees’ ability to find new employment or exercise their rights to organize. This debate highlights the broader issue of balancing employer protection with employee rights in severance agreements. The NLRB ultimately found that these clauses were indeed overbroad and unfair to dismissed employees. Meta was ordered to inform its employees of the illegality to ensure they understood their rights.
Legal Framework for Severance Agreements in Canada
In Canada, severance agreements must comply with employment standards legislation and common law principles. This framework ensures that severance packages are fair and meet minimum legal requirements.
**1. Employment Standards Acts:
- Each province and territory in Canada has its own employment standards legislation, which sets out minimum requirements for severance, including notice periods and compensation. Employers must ensure that severance agreements meet or exceed these minimum standards.
**2. Common Law Considerations:
- Under common law, severance agreements should provide “reasonable notice” or compensation in lieu thereof. Courts assess whether the terms of a severance agreement are fair based on factors such as the employee’s tenure, position, and the circumstances of their departure.
Are Restrictive Clauses Legal in Canadian Severance Agreements?
In Canada, restrictive clauses in severance agreements are generally legal but subject to specific limitations. The enforceability of these clauses often hinges on their reasonableness and whether they align with legal standards.
- Non-Compete Clauses:
- Non-compete clauses are typically not enforceable in Ontario. Only select employees may be bound by non-compete clauses, and even then, the courts would assess whether these clauses protect legitimate business interests without unduly restricting the employee’s future employment opportunities.
- Non-Solicitation Clauses:
- Non-solicitation clauses, which prevent employees from soliciting former clients or colleagues, are typically more acceptable than non-compete clauses. However, they must be reasonable in scope and duration to be enforceable.
- Confidentiality Clauses:
- Confidentiality clauses are generally enforceable if they are reasonable and necessary to protect the employer’s confidential information. These clauses should clearly define what constitutes confidential information and the employee’s obligations regarding its use and disclosure.
Ontario Law Perspective
In Ontario, severance agreements are governed by the Employment Standards Act, 2000 (ESA) and common law principles. Here’s how restrictive clauses are generally viewed under Ontario law:
- Compliance with the ESA:
- The ESA provides minimum standards for severance, including notice periods and compensation. Any severance agreement in Ontario must meet or exceed these standards. However, the ESA does not specifically address restrictive clauses, so these must be evaluated based on common law principles.
- Reasonableness of Restrictive Clauses:
- In Ontario, restrictive clauses in severance agreements must be reasonable to be enforceable. As mentioned above, non-competitions will not be permitted for the vast majority of employees. Non-solicitation clauses should be limited in duration, geographic scope, and the type of activity restricted. Overly broad or restrictive clauses may be deemed unenforceable by courts.
- Common Law Principles:
- Ontario courts assess restrictive clauses based on common law principles. For a non-solicitation clause to be enforceable, it must protect legitimate business interests without unfairly limiting the employee’s ability to find new employment, which involved a consideration of their scope and duration.
- Recent Judicial Trends:
- Recent case law in Ontario reflects a cautious approach to enforcing restrictive clauses. Courts have been scrutinizing these clauses more closely, ensuring they are not overly restrictive and that they serve a legitimate business purpose without disproportionately impacting the employee.
Conclusion
The legality of restrictive clauses in severance agreements in Ontario requires careful consideration of both legal standards and common law principles. The recent case involving Meta underscores the importance of balancing employer protection with employee rights. While restrictive clauses can be enforceable, they must be reasonable and fair.
Employers should draft clear and reasonable clauses that align with legal requirements, while employees should review these agreements carefully and seek legal advice if necessary. By understanding the legal landscape and recent developments, both employers and employees can better navigate the complexities of severance agreements and restrictive clauses.
To better understand your employment rights, we encourage employees and employers to seek legal advice. We at Whitten & Lublin are happy to provide insight and advice into your specific circumstances. If you are looking for employment lawyers and would like more information about what Whitten & Lublin can do for you, please contact us online or by phone at (416) 640-2667 today.
Author – Rachel Patten