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Are your restrictive covenants enforceable?

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It is no secret that Canadian courts have a strong aversion to restrictive covenants in the employment context.  The common law presumption has long been that such obligations are restraints on trade, and are therefore prima facie unenforceable unless they are reasonable between the parties and with reference to the public interest.

Courts generally consider three factors in determining the reasonableness of a restrictive covenant:

  1. Does the employer have a proprietary interest entitled to protection?
  2. Are the temporal or spatial limits of the covenant too broad?
  3. Is the covenant overly broad in the activity it proscribes because it prohibits competition generally and not just solicitation of the employer’s customers?

With the third factor, courts have effectively concluded that restrictive covenants must be limited to non-solicitation unless the impugned employee is so important and unique to the organization that a non-compete obligation is required to protect its legitimate proprietary interests.  Even if this onerous threshold is satisfied, a court will be inclined to scrutinize the limits and certainty of the covenant more carefully.

The importance of careful drafting becomes most apparent when there is an urgent need to enforce restrictive covenants against a departed employee.  Employers all too often commence injunctive proceedings only to receive an expensive lesson that their contracts need to be re-drafted.  This was precisely the outcome in the recent decision Benson Kearley & Associates Insurance Brokers Ltd., v. Jeffrey Valerio, 2016 ONSC 4290 (“Benson”).

In Benson, the employer terminated the employment of several employees following their refusal to sign new employment agreements.  Those employees, who had previously signed restrictive covenants, subsequently joined a competitor and immediately began to successfully solicit their former clients.  The employer commenced legal proceedings and brought a motion for an interlocutory injunction seeking to restrain the former employees from soliciting and obtaining the business of its clients.

When an employer seeks the interlocutory enforcement of an agreement which imposes limitations upon an individual’s ability to earn a livelihood, the common law generally requires the employer to establish a strong prima facie case that the restrictive language relied upon is enforceable.  Where the restrictive language is unreasonable or ambiguous on its face, a court will be unwilling to grant the extraordinary relief of an injunction on an interlocutory basis.

Within that legal backdrop, the Court in Benson dismissed the motion finding that the employer failed to establish a strong prima facie case that the impugned non-solicitation clause was enforceable.  Specifically, the Court noted that:

  • there was no temporal limit to the non-solicitation clause; and
  • the non-solicitation clause prohibited solicitation of all clients of the employer and not just those clients that were part of the employees’ books of business.

With respect to the second point, the Court emphasized that the obligation was ambiguous and effectively amounted to a non-competition restriction given that the former employees had “no way of knowing whether any particular potential client they may wish to solicit is a current client of [the employer]”.

The decision in Benson reminds employers that restrictive covenants may be nothing more than ink stains on paper if they are improperly drafted.  In that respect, employers are encouraged to avoid template restrictions that are uniformly inserted in the employment agreements of all employees – the enforceability and necessity of restrictive covenants is always a contextual and individualized assessment.

The following is a non-exhaustive list of factors to consider when drafting restrictive covenants:

Non-Competition Covenants

  • Is the employee so important and unique that a non-compete obligation is necessary?
  • Does the clause impose non-compete restrictions despite being dressed as a non-solicitation covenant (e.g. may not accept the business of customers, may not deal with customers, may not solicit any customers, etc.)?
  • Is the non-compete restriction limited to “competitors” of the employer’s “business”?
  • Are the terms “business” and “competitors” defined restrictively enough?
  • Are there reasonable restrictive geographic and temporal scopes to the non-compete obligation?
  • Is there a complementary non-solicitation covenant included?

Non-Solicitation Covenants

  • Does the employee have contact with the employer’s “customers” and/or “prospective customers”?
  • Are the employer’s “customers” and/or “prospective customers” properly defined and identifiable to the employee?
  • Is the non-solicit restriction limited to “customers” and/or “prospective customers” serviced and/or pitched by the employee within a reasonable time period prior to the cessation of the employment relationship?
  • Is the non-solicit restriction limited to situations of re-employment in a competitive business?
  • Are there reasonable restrictive temporal scopes to the non-solicit obligation?

Titus Totan

About the Author: Toronto employment lawyer Titus Totan supports both employee and employer clients in all areas of employment law, including employment standards, contractual and implied obligations, terminations, workplace investigations and workplace human rights.