Restrictive Covenants in Employment Law: What Are They?
What are restrictive covenants in employment law?
Restrictive covenants in employment law are terms in employment contracts, also known as “clauses”, that limit an employee’s actions during their employment and/or after they leave their employment.
What types of restrictive covenants exist in employment law?
There are three main types of restrictive covenants in employment law: non-competition clauses, non-solicitation clauses, and non-disclosure/confidentiality clauses.
What are non-competition clauses?
Non-competition clauses restrict employees from working for a competitor or starting a competing business during their employment and/or after they leave their employment. Such clauses usually specify the geographical area where the employee is restricted from competing with their employer and provide a duration during which the employee is restricted from competing with their employer.
Example of a Non-Competition Clause: “The Parties agree that for the Restricted Period, the Employee shall not, without the prior written consent of the Employer, engage in services of a Competing Business within the Restricted Territory nor will the Employee solicit interest in or be involved in any such Competing Business, directly or indirectly. The terms Restricted Period, Employee, Employer, Restricted Territory and Competing Business as defined at paragraph 1 of this Employment Agreement, shall apply for the purposes of this section.”
As of October 2021, non-compete clauses or agreements became illegal. However, there are 3 exceptions to Ontario’s ESA non-compete rule which are as follows:
- people who signed there non-compete before October 2021 are still held to their non-compete agreement
- executives in any “chief” executive position, such as a CEO, CFO, CMO, CIO, etc.
- if a person sells or leases their business or part of their business and then becomes an employee of the business they sold, the new owner has the right to enter into a non-compete agreement with that person.
What are non-solicitation clauses?
Non-solicitation clauses restrict employees from soliciting (taking) clients, customers, or other employees of their former employer with them after leaving that employer.
Example of a Non-Solicitation Clause: “During the term of employment and for a period of twelve (12) months following cessation of Employee’s employment for any reason, the Employee agrees not to directly or indirectly solicit, induce, or attempt to solicit or induce, in the course of being engaged in a business involved in providing similar services and/or products to that of the Employer, any customer or potential customer of the Employer with whom the Employer had material contact during the last 12 months of the Employee’s employment with the Employer, for the purpose of diverting the customer’s business away from the Employer.”
What are non-disclosure/confidentiality clauses?
Non-disclosure/confidentiality clauses restrict employees from disclosing confidential information about the current or former employer. Confidential information is often defined in the employment contract as trade secrets and proprietary knowledge of the employer.
Example of a Non-Disclosure/Confidentiality Clause: “The Employee shall keep strictly confidential and shall not divulge, publish, use or disclose in any way whatsoever, for personal profit or personal interest or the interest of a third party, any and all Confidential Information concerning the Employer. All Confidential Information is of the exclusive property of the Employer. The terms Employee, Employer, and Confidential Information as defined at paragraph 6 of the herein Employment Contract, shall apply for the purposes of this section.”
Are restrictive covenants legal?
The answer is: it depends. Restrictive covenants must be reasonable in scope, duration, and geographical area for them to be enforceable in Ontario. The terms must also be clear, specific, and comply with legislation and judicial decisions in Ontario and Canada for them to be enforceable. A court of law’s analysis of the enforceability of a restrictive covenant is highly contextual and dependent on the specific facts of each case.
What should employees watch out for?
Employees should carefully read through and review the terms of their employment contracts before they sign them. Employees should particularly look out for restrictive covenants to decide if they are reasonable. If in doubt, employees are encouraged to seek the advice of an experienced employment lawyer to review the agreement with them.
Why is it Important to have your Employment Contract Reviewed?
It is important for employees to have their employment contracts reviewed because:
- it ensures they understand their rights and responsibilities outlined in the contract, including any restrictive covenants;
- it helps employees identify potentially unfair terms in their employment contract that could restrict future employment opportunities; and,
- it affords them an opportunity to negotiate more favourable terms or to seek clarification on ambiguous terms in the employment contract before signing it.
Contact Us
If you have further questions about restrictive covenants and how they may impact your employment, or you are contemplating taking a new job and wish to discuss the terms of your offer of employment with an employment lawyer before you sign it, please contact Whitten & Lublin. The lawyers at Whitten & Lublin are experienced, knowledgeable and happy to assist employees with their employment law matters. To schedule a consultation, please contact Whitten & Lublin online or by phone at (416) 640 2667.
Author – Carly Waisglass