A SYNOPTIC LEGAL ANALYSIS OF NON-COMPETE CLAUSES IN EMPLOYMENT CONTRACTS

Introduction

It is realistically presumptive that in the effort of giving legal protection to the industry expended in the establishment and management of businesses, it is no longer novel for employers to include certain clauses in employment contracts with their employees. These clauses are generally described as restrictive clauses/covenants of trade and more narrowly and legally known as non-compete clauses as they prospectively function to restrict employees, post-employment, from working or engaging in any business which is in competition with that of his employer. With this background, this writing intends to provide a synoptic legal guide on how the law works especially on the enforceability of such clauses considering, the balancing of the employers’ interest with that of employees who reasonably need job at any relevant point for survival. Reference re Public Service Employee Relations Act (Alberta), 1987 CanLII 88 (SCC).

NON-COMPETE CLAUSES and the Law

In the course of our work at Osuji & Smith Lawyers, we are aware that one of the legal implications arising out of contractual employer-employee relationships is the enforceability of non-compete clauses in employment contracts. In determining enforceability of such restrictive covenants, a legion of decided cases in Canada have offered certain guiding principles and notwithstanding the intendment of employers, non­ compete clauses are generally contrary to public policy and unenforceable in law as decided in the leading case of J.G. Collins Insurance Agencies v. Eisley Estate [1978] 2

S.C.R. 916. As this appears to be a pro-employee decision, however, it is a rebuttable legal position as a set of principles are at play and fundamentally depends on their application to the peculiar factual circumstances of each case. These general governing principles include reasonableness of the restriction, protection of employer’s propriety interest and wording of the non-compete clause in the employment contract.

• Reasonableness

Proving reasonability or otherwise of non-compete clauses, on the balance of probability, is a floating process. Like the non-compete clause itself, the question of whether or not a non-compete clause is reasonable is a question of fact and depends on the individual circumstances. Still, judicial precedents have laid down a three-prong disjunctive test to be employed in determining reasonableness. First is the scope of the restricted activity. The court will be persuaded to hold a non-compete clause reasonable where it narrows the restriction to the same line of an employer’s business or prohibits solicitation of the employer’s customers and clients/clients. A broad restriction of any kind of trade or business has been held to be unreasonable and contrary to public policy.

Second is the duration of the restriction. To be reasonable, the restrictive period should at least be around six months or less provided that such short period will not prejudice any proprietary interest of the employer. In determining a reasonable period, judicial attitude to this criterion has been quite helpful. Evident from the Supreme Court of Ontario’s decision in Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII) is the unreasonableness of a twelve-month restrictive period.

The third test relates to the geographical scope of the restriction. A non-compete clause is likely to be held reasonable where it restricts the employee from engaging in competitive business(es) in the same area or close to where the employer carries on his business. Where the territorial restriction is overly wide and broad or states no geographical limit, it is more likely to be legally unreasonable as held in Kohler Canada Co. v. Porter (2002), 2002 CanLII 49614 (ON SC) and the Albertan case of Enerflow Industries Inc. v Surefire Industries Ltd., 2013 ABQB 196 at 36 (CanLII).

• Propriety Interest vs Public Interest

Democratic principles of fairness, equity and justice are also relevant and applicable to employment law. Given that non-compete clauses are generally unreasonable and contrary to public policy, a rebuttal of this presumption requires proof of the employer’s exceptional proprietary interest in addition to establishing potential competition with principles of reasonableness. This may relate to balancing both private and public interests in establishing detrimental incidents, e.g, employee’s acquisition of an employer’s trade secrets or influence over the latter’s customers as a result of the skill, judgment and trust reposed in the employee during employment. In the words of Justice

1. T. McCarthy in Enerf/ow Industries Inc. v Surefire Industries Ltd (Supra) at 35, when quoting the decision in Thienes v Godenir, 2011 SKQB 271, 380 Sask R 145 at para. 41, stated that “If the restrictive covenant cannot be seen as protecting a valid proprietary interest it is not enforceable. If the sole purpose of the restrictive covenant is to prevent competition, it will be held to be contrary to the public interest.”

• Wording and Bargaining Power

From the forgoing, it will appear that the enforceability of non-compete clauses are wholly dependent on the choice of words expressed in employment contracts. As such, non­ compete clauses will be judicially interpreted as presented having regards to conventional interpretational rules.Venture Capital USA Inc. v. Yorkton Securities Inc., (2005), 2005 Canlll 15708 (ON CA). Where wording is ambiguous, “freedom of contract, equality of bargaining power are also important considerations as to whether contra proferentum might apply to interpretation disputes”. Enerflow Industries Inc. v Surefire Industries Ltd (Supra) at 33.

Conclusion

Non-compete clauses are not forbidden as they operate to balance the interests of both the employer and employee, post-employment. With the above analysis, the effort of having this specie of legal and economical protection in employment contracts should be conscious of the legal idiosyncrasies that define their reasonableness and enforceability. Thanks for reading and we hope this helps.

Author: Akindele Tawoju

Please note that this publication does not proffer legal advice and does not create a lawyer-client relationship. For assistance on any legal issues in relation to non-compete clauses and employment in general including employment contract review, please contact us today by sending an e-mail to [email protected].