Name Your Time and Place: The Unique Requirements of Restrictive Covenants
The employer-employee relationship is still based around a basic model of service. The employee provides their best efforts on the job, and in turn the employer compensates them either with wages or a salary, possibly benefits, et cetera.
In turn for this though, the employer expects loyalty, at least as much that the employee will not then leave and take the employer’s business with them. Naturally, the employer wants to protect their business interests that they have worked hard to develop. In order to do so, they will often include 'restrictive covenants' in their employment contracts. These clauses, better known as non-solicitation clauses or non-competition clauses, are meant to stop former employees from 'stealing' their former employer's business.
However, the way these clauses actually work is not that simple.
To start with, a ‘non-solicitation clause’ (or non-solicit for short) and a ‘non-competition clause’ (or non-compete), while often thought to be the same thing, are actually quite different. A non-solicit is an attempt to stop a competitor from stealing a former employer's customers or clients, whereas a non-compete is an attempt to stop a competitor from doing business altogether.
Confused? Well, according to the Court of Appeal, you’re not alone.
In the recent Ontario Court of Appeal decision of Donaldson Travel Inc. v. Murphy, 2016 ONCA 649, the Court upheld a lower Court ruling that a clause intended to be a non-solicit was actually a non-compete, and in turn was not enforceable.
The clause in question read as follows:
Mary agrees that in the event of termination or resignation that she will not solicit or accept business from any corporate accounts or customers that are serviced by Uniglobe Donaldson Travel, directly, or indirectly.
While the clause says ‘solicit,’ it is missing some key terms. An employer can restrict a former employee from soliciting clients, but the restriction has to be reasonable. For example, they cannot restrict an employee from going after clients forever, only for a set period of time. While two years was formerly a common standard, lately courts have shown preference for restrictions no longer than 6 months. These shorter time periods recognize an employer’s interests up until a certain point, but also ensure the individual’s freedom to make a living.
The other key element missing here is geography. For a non-solicitation clause to be approved by the courts, it must feature a defined territory in which an individual cannot solicit business. In this instance, should Mary wish to relocate to another province, or even the United States, she would still be restricted from seeking business, which is unfair. The geographic area featured in these clauses must be precise, and one that can be legally defined. In one famous Supreme Court case, the phrase “Metropolitan City of Vancouver” was struck down because there is no such thing as the Metropolitan City of Vancouver. For Toronto readers, the ‘City of Toronto’ or the ‘City of Mississauga’ are legally defined terms, and far more clear-cut than ‘Greater Toronto Area.’
The lower court judge cited a 2008 Ontario Court of Appeal case H.L. Staebler Company Ltd. v. Allan, 2008 ONCA 576 (“Staebler”), which laid out a three-part criteria for analyzing non-solicitation clauses:
(i) did the employer have a proprietary interest entitled to protection?
(ii) are the temporal or spatial features of the covenant too broad?
(iii) Is the covenant on enforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employer?
The Court further held that non-solicitation agreements are usually enough to do the trick, and that non-competes are really only necessary in ‘exceptional circumstances.’ With this particular clause, the other determining factor was the line about “accept[ing] business from any corporate accounts or customers” of the employer. It is one thing not to solicit business; it is another, separate restriction to dictate that business cannot freely come to you.
For all of these reasons, the Court ruled that the clause was a non-compete, and not simply a non-solicit, and was unreasonable and thus unenforceable. While courts at one time may have been agreeable to editing a clause in order to make it enforceable, this is no longer the practice. If a clause such as this is found to be improper, the Court will choose to throw it out altogether rather than edit it down.
In reviewing the decision, the Court of Appeal agreed with the lower Court’s assessment. The clause did not contain the necessary elements required to be valid, and so the judge was right to throw it out. As the Court of Appeal had previously held in Staebler, “the fact that the clause might have been enforceable had been drafted in narrower terms will not save it. The question is not whether a valid agreement might have been made but whether the agreement that was made is valid.” I could not have said it better myself.
For employers, it is absolutely paramount to have restrictive covenants drafted by a professional if they are expected to be enforceable. As in the example with restrictions on duration, the law on restrictive covenants changes frequently. Case law is continually providing lawyers with examples of clauses that may be acceptable, and clauses that are certainly not. An employment lawyer can make sure your restrictive covenant is not only right for your business, but stays up to date with the changing times. This may mean tweaking the language in the clause frequently, but the headache is well worth it once that non-solicit or non-compete actually comes into play.
For employees, the honest truth is that the majority of the non-competes and non-solicits out there today may not be valid, and may not restrict you as firmly as you would think after you leave your position. That said, violating a clause that is properly structured is a violation of your employment contract, and can come with steep consequences from your former employer. Do not assume that your clause is invalid just because other clauses are! It is always worthwhile to consult with an employment lawyer before beginning your new venture to make sure that your new business will not violate your old employment contract.
The bottom line is that there really is a time and place for everything – especially when it comes to restrictive covenants.