Is The Non-Competition Clause Enforceable?
When starting a new job, it is common for an employee to be required to sign a contract that outlines the terms and conditions of their starting employment. These contracts generally go over the terms of employment, the employee’s benefits, and grounds for termination to name a few. In some cases, an employer may also ask an employee to sign something called a non-competition clause. A non-competition clause is intended to protect the employer upon the breakdown of the employment relationship with an employee. Essentially, non-competition clauses prevent an employee from pursuing similar employment with a competitor or starting their own competing business during and after employment.
Non-Competition Clauses vs. Non-Solicitation Clauses
Non-competition clauses and non-solicitation clauses are very similar, but have very different implications. On one hand, a non-competition clause prevents an employee from gaining employment with a competitor, or starting their own competing business during and after employment. Without a non-competition clause, there is no prohibition against an employee competing with their former employer. In contrast, a non-solicitation agreement will allow a former employee to work for a competitor, but prevents them from soliciting clients or employees of their former employer for a specific period of time. A non-solicitation clause is intended to protect employers from former employees taking clients when they leave. When a former employee has a close relationship with clients, allowing them to solicit these clients may give them an unfair advantage against their former employer. In general, non-competition clauses are a lot more restrictive than non-solicitation clauses. However, non-competition clauses are therefore much more difficult to enforce.
Non-Competition Clauses: General Rules
Although non-competition clauses can be difficult to enforce, there are some general rules that must be followed in order for them to be considered. First, the length of a non-competition clause should not be unreasonably long. Typically, this period should be no longer than one year; however, it can be longer if the circumstances necessitate it in relation to protecting the employer. For example, in Herff Jones Canada Inc. v. Todd, a four-year non-competition clause was enforced where the employees were salespeople selling class rings to colleges. The court determined that the nature of the clients and their relationship to a class ring service provider gave former employees an unfair advantage over their past employer if they were to start their own class ring company while the clients they had interacted with under their previous employment were still attending college. Therefore, in the above instance, the courts were able to enforce a longer non-competition clause because it was rationally connected to the protection of the employer.
A non-competition clause should also not be too broad and cannot prevent the employee from working where the employer is not doing business. Including all of Canada or a specific geographical area such as a whole city is considered too broad. For instance, in Ernst & Young v. Stuart, the court did not enforce a non-competition clause that prevented an accountant from practicing accounting within a 50-mile radius of the firm for one year. The court concluded that the range set by Ernst & Young was the commercial heart of that province, and as such, the accountant was unable to practice his profession. The court found this was an unreasonable restriction for the protection of the employee.
In wrongful dismissal cases, courts have considered the existence of a non-competition period in determining the period of reasonable notice, and even increasing wrongful dismissal damages. For example, in Ostrow v. Abacus Management, the court considered the presence of a non-competition clause in extending the reasonable notice period for the terminated employee. After being employed for 9 months, Mr. Ostrow was terminated, and his contract restricted him for seeking employment from competitors for six months. In this case, the court ultimately awarded Mr. Ostrow damages in lieu of notice in the amount of six months’ pay, and held that the existence of the non-competition clause in Mr. Ostrow’s employment contract had increased the period of reasonable notice.
What Makes a Non-Competition Clause Enforceable?
Despite the fact that it is often difficult to enforce a non-competition clause, there are some instances in which the courts will find one enforceable. Ultimately, the enforcement of a non-competition clause is an exception, not a rule. The courts have determined a test to conclude whether a non-competition clause is enforceable. These non-competition clauses must:
- Be limited in length;
- Be limited in geography;
- Generally list the prohibited activities;
- Have clear, unambiguous language; and
- Generally have a public interest in enforcing it.
The above guidelines assist the courts in determining whether or not a clause is enforceable. However, as previously discussed, there are some instances in which the rules do not apply. Thus, despite some of the general rules and guidelines outlined for non-competition clauses, it is important to seek the advice of an experienced employment lawyer to help you determine if your case requires special circumstances.
Overall, non-competition clauses can be difficult to enforce but there are some situations in which they are needed. If you believe you are being unfairly harmed by a non-competition, or non-solicitation clause, contact Osuji & Smith Lawyers to discuss the circumstances of your contract.
Written by: Jillian Cowan and Marie Beaupre-Olsen