Imagine this: You’ve recently graduated from professional schooling and just had a fantastic interview with a potential employer. Things went really well! They’re offering you a position with their company that includes an amazing salary supplemented by generous benefits. You’re over the moon – finally, you can begin to chip away at those student loans that have been hanging over your head.
You’re almost ready to sign the employment contract when you notice something a bit peculiar. One of the terms states that during the contract period and for twelve months after it is terminated, you are not permitted to solicit business from the customers of the employer.
Before putting pen to paper, it’s crucial to know exactly what this provision is about, and the consequences of agreeing to it. So let’s take a look.
Provisions such as the one mentioned above are commonly known as non-solicitation clauses, which are a form of restrictive covenant. Simply put, non-solicitation clauses prevent employees from soliciting the customers, clients, employees or business partners of his or her employer. These clauses generally apply throughout the duration of employment as well as for a defined period of time after employment ends.
The rationale for these types of clauses is to protect the employer’s customer base or business relationships. Since an employee will be familiar with many of the employer’s clients and other parties, employers can use these clauses to protect against employees who may seek to solicit these individuals if they were to leave their employment and join a competitor.
While generally permitted, not all non-solicitation clauses are enforceable. Courts will approach any restrictive covenant critically, as they are reluctant to interfere with an individual’s ability to earn a living.
The Supreme Court provided useful guidelines for determining whether a non-solicitation clause is enforceable in Elsley v J.G. Collins Insurance Agencies. First, the party seeking to enforce the clause must have a proprietary interest entitled to protection. Second, the temporal or spatial features of the clause cannot be too broad. Finally, the clause cannot be against competition more generally and must be limited to preventing the solicitation of clients from the former employer.
Temporal and spatial features simply refer to the time period during which the clause applies and the geographic range to which the clause applies, respectively. For example, an employee may agree upon signing an employment contract with their employer not to solicit clients of the employer within a 10 kilometre radius of their workplace (space limitation) for three years after the termination of the employment agreement (temporal limitation).
If the clause is against competition more generally, it may be held to be a non-competition clause and is therefore likely invalid. These clauses will be further discussed below.
The courts will assess these features to determine whether they are reasonable. If the clause is deemed to be unreasonable, it will be struck out. Courts will not “read the clause down” or fix it so that it is reasonable. Quoting the court from Mason v. Provident Clothing and Supply Co., Dickson J. noted in Elsley that “the question is not whether they could have made a valid agreement but whether the agreement actually made was valid.”
As briefly mentioned earlier, employment contracts may include a provision where, as a signatory, you agree not to work for another employer or engage in a business of any sort that is in competition with the employer’s business after the termination of the employment relationship with the employer.
These types of clauses are commonly called non-competition or non-compete clauses, and they are another form of restrictive covenant. Much like non-solicitation clauses, these clauses usually include temporal and spatial limitations.
Under section 67.2(1) of the Employment Standards Act (ESA), non-compete clauses are not permitted in Ontario for most types of employees as of October 25th, 2021. However, the ESA does not act retroactively on non-compete clauses entered into prior to this date. This means that if you entered into a non-compete agreement before October 25th, 2021, it may be enforceable. Notably, the ESA does not prohibit non-solicitation clauses.
All that being said, courts have been hesitant to enforce non-compete clauses in many instances. As MacPherson J.A. wrote in Lyons v. Multari (2000):
“Generally speaking, the courts will not enforce a non-competition clause if a non-solicitation clause would adequately protect an employer’s interests.”
Since competition between businesses usually benefits the public by providing more options to choose from, the courts are often reluctant to place limitations upon it. However, as the Supreme Court stated in Elsley, a non-competition clause agreed to may be enforceable “if it is reasonable between the parties and with reference to the public interest”. Don’t forget that a non-competition clause is also invalid if it was not agreed to prior to October 2021!
The burden is on the party seeking to enforce the clause to prove that it meets these conditions. If they fail to do so, the clause will be deemed invalid and struck out.
Whether you’re an employer or an employee, it’s important to know if a non-solicitation clause is valid and enforceable. Non-solicitation clauses are very common, and there is a tremendous likelihood that you may come across one at some point. Regardless of whether you are seeking to enforce a non-solicitation clause or having one enforced against you, we encourage you to contact us before taking action to ensure that your interests are protected.