Enforceability of Non-Compete Clauses in an Employment Contract
As an employment lawyer who represents small business as well as employees, I am often asked to advise on the contents of a written employment contract. Many of the key provisions in an employment contract are concerned with what happens after the termination of employment. This article deals with “restrictive covenants”, and more specifically, what are sometimes called “non-compete” clauses.
A non-compete clause effectively restricts the activities that an employee can carry out – even when they are no longer employed at all or being paid. It is for this reason that courts are wary to enforce non-compete clauses, unless they are drafted carefully so as not to be unduly restrictive or unfair.
In one of the leading Canadian cases on restrictive covenants, Elsley v. J.G. Collins Insurance Agencies Ltd., the Supreme Court of Canada wrote that the “public interest” must be considered when deciding whether such a clause is enforceable:
A covenant in restraint of trade is enforceable only if it is reasonable between the parties and with reference to the public interest. As in many of the cases which come before the courts, competing demands must be weighed. There is an important public interest in discouraging restraints on trade, and maintaining free and open competition unencumbered by the fetters of restrictive covenants. On the other hand, the courts have been disinclined to restrict the right to contract, particularly when that right has been exercised by knowledgeable persons of equal bargaining power.
In deciding whether it is in the public interest to enforce a restrictive covenant, the courts will consider:
- The nature of the employer’s interest, and whether it is entitled to protection;
- The temporal and spatial restrictions on the employee; and
- Whether the clause prevents the employee from competing generally, or whether it is limited to preventing solicitation of the employer’s business.
Generally, the courts will be more likely to enforce a “non-solicitation” clause, which precludes the employee from soliciting the employer’s business, than it will a non-compete clause, which restricts the employee generally from competing. Courts will also pay special attention to the scope of the clause – a clause that is limited to a specific geographical area, and is limited for a reasonable period of time, is more likely to be enforced.
Employers seeking to include a non-compete clause in their contract ought to seek legal advice before doing so. Because these clauses are subject to challenge in the courts, careful drafting is required.