Restrictive Covenants: What Did I Agree To?!

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Imagine that you have been the loyal and dedicated employee of the same employer for many years. After receiving a lucrative job offer from another company, you are able to make arrangements to part ways with your current employer amicably. Several months later, a client of your former employer approaches you and tells you that they are no longer happy with the services provided by your former employer and want to move their business over to you. The only problem is: you’re still bound by a non-solicitation clause which formed part of your employment agreement with your previous employer. Are you prohibited from taking on the client?

This is one iteration of a relatively common scenario that many employees face following the conclusion of their employment. Even when these employees have signed and agreed to these restrictions within their employment agreement, confidentiality agreement or other document, they are often still surprised to learn that their obligations to their previous employer do not simply end at the conclusion of the relationship. Often, employees agree to these terms at the start of their employment relationship without considering the impact they will have on their ability to find replacement employment down the road.

When will Restrictive Covenants be Enforceable?

Employers are often shocked to learn that by default, there is nothing stopping an employee from resigning, joining a competitor and pursuing their clients. There are some exceptions, such as in the case of fiduciary employees, but generally speaking, if an employer wants additional protection, it must be negotiated and agreed upon. As we have set out in other posts on this subject, restrictive covenants will be enforceable but only to the extent they are deemed to be reasonable. There must be a legitimate business interest to be protected, and the terms and scope of the covenant must be reasonable.

Non-competition clauses, which purport to prevent an individual from working in the same industry , are prima facie unenforceable. This means that generally speaking, the courts will not be willing to uphold such a fundamental restriction on an employee’s ability to find alternate employment and earn a living. Courts will consider enforcing a non-competition clause if a less restrictive manner of protecting the employer (such as a non-solicitation clause) will not be sufficient. Courts are more likely to uphold non-solicitation clauses, which seek to prevent an employee from going after the clients and employees of their former employer, but which do not limit their ability to work in their chosen field. However, even non-solicitation clauses must be reasonable in order to be enforceable.

When considering whether or not the restrictive covenant is reasonable, all aspects of the restriction must be considered. For a non-solicitation clause, this will include not only the duration of the restriction, but what exactly the employee is restricted from doing. For instance, is the employer attempting to prevent the employee from soliciting only those clients whom they had direct dealings with in the last twelve months of their employment? Or is the restriction broad enough that it could include new clients obtained after the employee has left the company, or clients the individual never had contact with? Does it truly seek to prohibit only the active solicitation of employees, or does it also prevent employees from accepting work from clients of the employer regardless of how the client comes to the employee? If the latter, it is more consistent with a non-competition clause.

Similar considerations apply for a non-competition provision. If a court is willing to consider one at all, the parameters to be examined include the duration of the restriction, the geographic scope it purports to cover, and the nature of the restriction itself. For instance, if a non-competition provision purports to restrict an employee in a relatively specialized industry from working with any business that is notionally competing with the employer (or any of its affiliates or subsidiaries) across all of North America, and the evidence is that the employer only operates in Winnipeg, it is unlikely to be enforced.

As much of the case law in this area has demonstrated, courts will not fix an overly restrictive clause in order to make it enforceable. Rather, if a court deems a clause to be unreasonable, they will simply strike it out altogether. As we often tell our employer clients, if you ask for too much, you get nothing.

What Does this Mean for Employees?

While it is true that restrictive covenants will be closely scrutinized by the courts and may ultimately be deemed unenforceable, that does not mean that an employee should simply agree to terms that set unreasonable limits on their post-employment activities. Similarly, it does not mean that an employee who has already agreed to such terms should assume they can do what they want without repercussion.

In cases where the restriction is, in fact, enforceable, an employee who breaches their obligations may expose themselves to significant liability if their employer pursues an action against them. In addition to damages, an employer may seek injunctive relief, which could result in a court order prohibiting the employee from any conduct which would constitute a further breach.

Even in situations where the enforceability of the restrictive covenant is questionable, employees must tread carefully. We are often retained to assist employees who have received a cease and desist letter from their former employer threatening legal action if the employee does not remedy the breach. Even if the restriction is ultimately unenforceable, the employee will have to spend time and incur costs to respond to the letter or defend against a claim initiated by the employer. While some of these costs may ultimately be recovered, dealing with these claims is expensive, time consuming and emotionally taxing, especially if an injunction is sought.

We encourage employees to contact us to review their employment agreement prior to signing to ensure that you are not agreeing to terms that are unduly restrictive. If you have agreed to a covenant that is interfering with your ability to find work or to operate your business, please do not hesitate to contact us. In some cases it may be possible to work with your employer to agree on less restrictive terms or on a specific exemption. Finally, if you receive a communication from your former employer alleging a breach of your obligations, we encourage you to contact us as soon as possible to avoid further escalation of these issues.

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