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Non-competition agreements: When less is more

EDITOR’S NOTE: ‘Grey Zone: Not all employment law is black and white’ is a weekly series, in partnership with John Hyde of Hyde HR Law in Toronto. This series takes a deeper look at issues in which senior workplace leaders and HR professionals need to consider legal implications.

Many employers like to talk about how their people are their greatest strength.

What these employers do not say — but what they know — is that their people are also their greatest weakness.

The loss of a key client-facing employee to a competitor can be a crippling loss for employers in the sales and service industries. For these reasons, these employers often seek protection through the use of restrictive covenants — non-competition and non-solicitation agreements with key employees.

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Our clients are often surprised to hear that many non-competition and non-solicitation clauses are not even worth the paper they are written on.

When it comes to drafting those clauses, less is more, because courts will only enforce agreements that are “reasonable.” That said, what is reasonable can be difficult to determine.

Ironically, employers that seek the most protection end up with the least — if a non-competition or non-solicitation provision is defective, the company is left with no protection at all.

Finding the right balance is an exercise in skill, risk tolerance and still involves some guesswork, even for seasoned experts, as this area of law is not completely defined.

Here are some of the most common mistakes we see in the drafting of restrictive covenants:

Lack of clarity

Restrictive covenants, such as non-competition and non- solicitation agreements, must be clear. Any element of “grey” could render the entire agreement null and void.

The court will not enforce any restrictive covenant if the employee cannot read it and understand, with certainty, which conduct does or does not violate the agreement.

Non-competition agreements must clearly and coherently describe the nature of the industry within which the employee is barred from working.

Unlimited (or excessive) time

An enforceable non-competition agreement must be time limited, and that time limitation must be “reasonable.”

A reasonable time limitation will depend upon the company’s vulnerability to the employee and is very case-specific.

No geographical limitation

An enforceable non-competition agreement cannot apply world-wide. It must be geographically limited, and that geographic limitation must, again, be “reasonable.”

A reasonable geographic limitation will — like the time limitation — depend upon the company’s geographic reach and business presence.

This can vary significantly, but usually, a limitation described as “North America” or “Canada” is considered excessive.

The Trojan non-competition agreement

Courts are generally very reluctant to enforce non-competition agreements, but non-solicitation agreements pass muster more easily.

Non-competition agreements prohibit employees from doing business in the employer’s industry, region and/or with its clients, whereas non-solicitation agreements prohibit employees from contacting the employer’s clients or employees for business purposes after the employment relationship is terminated.

The difference between the two agreements can be grey, as certain contract provisions may overlap each other.

Sometimes, employers attempt to label non-competition agreements as non-solicitation agreements in order to avoid this issue. However, non-solicitation agreements that prohibit things like public advertising, “communication with” or “doing business with” are usually unenforceable.

Non-solicitation agreements – the moving target

In order for a non-solicitation agreement to be enforceable, the employee must be able to know exactly who he or she is prohibited from soliciting — without having to consult with the company.

Most employees do not have a complete list of the company’s clients and prospective clients when they walk out the door (at least, the company should hope they do not).

For this reason, non-solicitation agreements must be expertly drafted to prohibit employees from only soliciting clients and prospective clients with whom they actually dealt with. This removes the uncertainty without weakening the protection provided by the agreement.

No commercial justification

Courts will usually not enforce restrictive covenants that they do not consider to be “commercially justifiable.”

This single principle is what guides the entire enforceability analysis.

For instance, a store has no commercial justification for preventing a cashier or stocking clerk from working for a competitor.

The right mindset for restrictive covenants 

All employers should know that restrictive covenants are best used like a scalpel, not a sledgehammer.

Finding the right strategy and balance depends upon the specifics of each case.

Employers considering using restrictive covenants would be wise to seek the advice of experienced employment law counsel.

John Hyde advises management on all aspects of employment and labour law, including representation before administrative tribunals, collective agreement negotiation, arbitrations, wrongful dismissal defence and human rights.

Nicholas Goldhawk, a senior associate in the labour group at Hyde HR Law, co-wrote this commentary.