March 17, 2004

Preventing former employees from competing

Question: I own a business in a small town in Ontario . I am about to hire an employee, but I want to make sure that if he quits he won’t set up a competing business. What should I do?

Answer: It is important to require the employee to sign an employment agreement which includes a non-solicitation provision and, in appropriate circumstances, a non-competition clause, prior to starting work. This will provide some protection after the employment relationship ends.

A non-solicitation clause is used to ensure the employee won’t solicit customers for the purpose of selling any products or services which are substantially similar to those you currently sell. This clause can be drafted to be enforceable during the employment relationship and for a certain period of time thereafter.

A non-competition clause is broader in scope and can be used to ensure former employees do not engage in a business that competes with their former employer.

Courts are more likely to uphold non-solicitation provisions. Generally speaking, non-competition clauses are only enforceable in exceptional circumstances, whereas non-solicitation clauses are usually permissible. But in certain circumstances reasonable non-competition clauses may be upheld.

Non-competition clauses can be considered restraints of trade and contrary to public policy. The clause will be seen to be a restraint of trade unless the employer proves it has a proprietary interest deserving of protection, that it is reasonable in terms of duration and geographic location, and that a non-solicitation clause would not be sufficient to protect the employer’s interests. It is with respect to this last point that many non-competition clauses will fall. In most circumstances the employer’s interests will be adequately protected by a non-solicitation clause which prevents departing employees from soliciting clients, customers or other employees.

The basic goal of these restrictive covenants is to prevent the employee from using customer lists or trade secrets. They should not be used to prevent an employee from using his skills and knowledge or to prevent competition generally.

With respect to non-competition clauses, it is also important to ensure they are not too broad in scope. Trying to restrict your employee from starting a competing business anywhere in Canada for the next 15 years is not going to be found to be reasonable.

Since non-competition clauses are generally unenforceable, if you do include such a restrictive covenant you must include a severability clause. In the event the non-competition clause is found to be invalid by a court, a severability clause allows the court to "sever" the unenforceable provision from the rest of the agreement so the balance remains in force. Otherwise you run the risk of the entire agreement being found unenforceable because of the invalidity of the non-competition clause.

A third option is to also include confidentiality provisions in the contract to ensure confidential interests are protected. Certain employees, such as directors and managers, have a duty of loyalty and good faith and must avoid conflicts of interest. These duties survive past the end of the employment relationship. But other employees do not have that same obligation beyond maintaining confidential trade secrets and customer lists. You can expand their obligations by including terms with respect to confidentiality in the employment agreement.

Incorporating non-solicitation, non-competition (where appropriate) and confidentiality clauses into the agreement will protect an employer’s interests.

Peter Israel is the senior partner in the Toronto law firm of Israel Foulon LLP – Employment and Labour Lawyers. He can be reached at 416-640-1550 or pi@israelfoulon.com. A version of this article originally appeared in the Carswell publication, Canadian Employment Law Today

LEGAL DISCLAIMER: This article is for informational purposes only and is not intended to provide legal advice, which in all circumstances must be tailored to the specific facts of any problem. You should obtain a proper legal consultation in order to determine how this article applies to your specific situation.
Please feel free to contact Israel Foulon LLP to learn more at 416-640-1550.

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