Workplace Wire

Connecting employers to developments in labour, employment & pension law

The latest on Restrictive Covenants: Ontario Court of Appeal reminds employers on the law of restricting the activities of former employees

By

Preventing former employees from competing with your business or from soliciting your clients or employees can be a challenge.  The courts in Canada have consistently demonstrated a dislike for restrictions on departed employees.  This can likely be explained by a pervasive belief that Canada is a free society which not only allows but promotes commercial competition.  Courts are also generally speaking loath to restrict a former employee’s ability to earn a livelihood.

These concerns and deep seeded beliefs mean that courts are generally speaking only willing to enforce restrictive covenants both where such agreements are clear and unequivocal and where they are deemed necessary to protect a legitimate business interest.

Given this, courts have the habit of putting any restrictive covenant language in dispute under a legal microscope.  The recent Ontario Court of Appeal decision in Martin v. ConCreate 2013 ONCA 72 (CanLII) carried out such an analysis.  The decision is helpful in that it provides an up to date assessment as to the elements necessary in order for a restrictive covenant to be found to be enforceable.

The Court of Appeal’s assessment

The case involved a 20 year employee and partner of a construction firm.  The employee had signed an employment agreement which included restrictive covenants that described limits on the employee’s ability to compete or solicit business from the employer’s clients in the event that his employment was terminated.

The company subsequently terminated the employee’s employment.  He then started another company and was sued by his former employer.  The court then assessed the enforceability of the restrictive covenants.  The Court of Appeal specifically overturned the Ontario Superior Court’s finding that the non-competition and non-solicitation clauses were enforceable.

With respect to the non-competition clause, the contract described a 24 month “prohibited period” which stated that the employee could not compete for 24 months following the sale of the former employee’s interest in the business. The court found that this language was unenforceable, primarily because it was not possible to ascertain when such a sale may occur.  The court accordingly held that the non-competition clause was unreasonable as it did not have any fixed time limit.

With respect to restrictions from solicitation, the agreement stated that the employee was barred from communicating or otherwise dealing with any persons who were customers, dealers, agents or distributors, whether at the time of the sale of the former employee’s interests in the business or afterwards.  The covenant further referred to any products or services that compete with those offered by the employer, whether or not offered, or planned to be offered at the time of the sale of the employee’s business interest.  The court found that the language was unreasonable in that it restricted the employee from soliciting in relation to matters which the employee may not know about.  The court specifically remarked that there was no way the employee would be aware of all parties that his former employer was associated with or all the products or services the company offered or planned to offer following his departure from the company.

What does this mean for employers?

The case makes clear the importance of conducting a careful review of any and all restrictive covenants provided to employees and to ensure that they are both clear and reasonable for the specific circumstances, including the employee in question.

An employer will specifically need to be able to demonstrate that a deal was made, that the deal was clear, and that it was reasonable in terms of several factors, including the activities that were restricted, the length of time of the restriction, as well as the geographic area to which the restriction applied.

For further inquiries, please contact the writer at [email protected] or (+1)416-777-4175

Leave A Comment

Your email address will not be published. Required fields are marked *

*