In today's ever-changing workplaces, employees come and go. The economy continues to cause layoffs. Some Canadian employers utilize non-competition and restrictive covenants to ensure that their departing employee does not compete against them.
Restrictive covenants are designed to limit the abuse of confidential information, the solicitation of employees or clients or the competition against a former employer.
These agreements are considered to be a restraint of trade, and courts only enforce them with great caution. It is crucial, in our experience, that these provisions be well drafted, with specific attention given to the details of the situation. The biggest mistake that we see relates to a "cut-and-paste" or boilerplate approach. Typically, such an approach leads the employer to error, and the provisions have no utility whatsoever.
Key to Enforceability
Amongst other considerations, there are three key factors that must be considered when utilizing a non-competition or restrictive covenant in a Canadian workplace.
Duration
First, the agreement must be of reasonable duration. A very long time frame will not be upheld by a Canadian court. It will be viewed as unreasonable and a restraint in trade. There is no legally defined time frame, as each particular situation needs to be examined on its own merits.
Geographic Limitation
A clause that limits competition worldwide will likely be unenforceable. Indeed, a geographic limitation that is broader than necessary is likely to be struck down by a court. The geographic location must be precise, so as to defend the former employer's legitimate areas of concern. If an individual works as a sales person in a specific city, then typically the specific city, and not a broader area, will be considered reasonable.
Scope of Activity
The third factor is the scope of a business. The activity sought to be restricted must be precise, reasonable and well-defined. A classic example would be a sales person prohibited from engaging in any sales. Such a prohibition is far too large. An individual selling specific industrial equipment in a specific industrial sector is more likely to be justified than a broad, overreaching restriction.
Several other factors must be taken into account when preparing a restrictive covenant. In Canada, such agreements, if carefully prepared, stand a much greater chance of judicial enforcement.
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