Many employers use non-compete clauses or agreements in employment contracts to protect their business from former employees. These clauses prevent an employee from working for competitors and/or starting their own competing business. However, employers should be aware that these clauses are often unenforceable. When asking an employee to sign a non-compete clause or agreement, consider the enforceability and how the clause may affect your business.
Canadian Courts have generally treated non-compete clauses poorly because they represent a “restraint on trade”. In other words, the clauses restrict an individual's freedom to conduct business - which the Courts believe is contrary to public policy. The Courts have attempted to balance this philosophy against restraints on trade with their belief in the freedom to contract. Therefore, the Courts will only enforce an agreement that is reasonable between the parties and with reference to the public interest”.
Several factors go into determining if a non-compete agreement is “reasonable”. The Supreme Court has held since 1935 that a “covenant…must not go further than is reasonably adequate to give the protection that is to be afforded; if it goes too far or is too wide, either as to time or place or scope, it will not be enforced; and if bad in any particular, it is bad altogether”. This phrase was later codified into a three-part test in Elsley v. J.G. Collins Ins. Agencies Ltd.:
1) Did the plaintiff have a proprietary interest entitled to protection?
2) Were the temporal or spatial features of the clause too broad?
3) Is the covenant unenforceable as being against competition generally and not limited to proscribing solicitation of clients?
The Court’s analysis of the three part test in Elsley is further modified by considering the relationship between the parties and their respective bargaining power. Employees have relatively low bargaining power compared to their employers, and are therefore provided more protection in the law.
To understand if your non-compete agreement is enforceable, first consider if there is a proprietary interest that needs to be protected. The Courts have protected trade secrets, confidential information and trade connections in past cases. Secondly, consider the temporal and spatial features of your agreement. A reasonable length of time and geographic area will change based on industry. Some businesses, such as dry-cleaning, have a relatively small business area whereas internet companies will have larger areas that can be covered in a non-compete agreement. The temporal restrictions will vary according to the time required to repair customer relationships and compensate for the destabilizing effect the employee’s departure may have had. Finally, consider if a non-solicitation or other agreement would sufficiently achieve the goals of a non-compete agreement. Generally, the Courts will not enforce a non-compete agreement if another agreement would suffice.
Employers should pay close attention when using non-compete agreements. Moreover, employers should be aware that agreements they may currently be relying on may not be enforceable. Therefore, employers should carefully review their employment agreements and consider either creating a new non-compete agreement to be in line with the current legislation, or creating a new agreement as a replacement.
If you have questions about your employment agreement, contact us at (647)-494-9599, or email info@law365.ca.
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