Most employment contracts in Canada contain important sections (called “clauses”) that govern the rights and obligations of employees. The purpose of an employment contract is to set the rules regarding the entire employment relationship, including:
- compensation (what is the employee being paid to do their job – base salary, health benefits, pension plan, bonus, etc.)
- probation (is the employee under a “trial” period, where they may be fired with notice or pay within the first 3 months of their job?)
- duties and responsibilities (what are the agreed upon job requirements the employee is expected to perform)
- termination (under what circumstances can the employee be fired or resign from their job, and how much notice is required)
- restrictive covenants (are there restrictions on an employee’s activities after they leave the company)
In the above list of the most typical sections found in employment contracts, “restrictive covenants” refers to two basic types of post-employment restrictions on an employee’s activities: non-competition agreements and non-solicitation agreements.
Non-Competition Agreement
A non-competition clause in an employment employment means the employee has agreed to not compete with the employer once they leave their job for a certain amount of time, such as by starting their own competing business in the same industry, or by working for a direct competitor.
Non-Solicitation Agreement
A non-solicitation clause in an employment contract means the employee has agreed to not solicit (recruit) specific people that work with with the employer once they leave their job for a certain amount of time, such as employees, contractors or suppliers.
When is a Non-Competition Agreement or Non-Solicitation Agreement Legal?
The legal rules governing whether a non-competition agreement or non-solicitation agreement in an employment contract is legally enforceable is well-established. In setting these rules over time, the courts have tried to balance two competing interests: (a) the right of employees to freely use their knowledge and skills to earn a living (even if it means competing with the employer); and (b) respecting the right of people to freely negotiate their respective rights and obligations in an employment contract.
With those principles in mind, the courts have applied the general rule that in order to be legally enforceable, a non-competition or non-solicitation agreement must be “reasonable”. In making this determination, the courts look at the following main factors:
1. Does the employer have a “proprietary interest” that must be protected?
This will depend on the nature and type of business the employer operates, but often includes protecting their customer or client lists, trade secrets, trade connections, confidential information. However, the courts have been clear that proprietary interests an employer can protect with a non-competition or non-solicitation clause does not include a departing employee’s knowledge, skills and experience – even if they were gained as a result of working for the employer.
2. Is the temporal requirement too broad?
To be enforceable, a non-competition (or non-solicitation) agreement must be limited in time duration (i.e., when it expires). Otherwise, if they are overly broad, the courts are more likely to find them unreasonable and therefore unenforceable. In terms of time, the courts have generally been unwilling to enforce restrictions longer than 12 months – 24 months in length. In terms of geography, the courts have generally been unwilling to enforce restrictions that cover a large geography (e.g., worldwide vs. a specific city/town).
3. Is the geographic requirement too broad?
Similarly, in terms of geography, the courts have generally been unwilling to enforce restrictions cover a large geography (e.g., worldwide vs. a specific city/town).
4. Is the Scope of Activities it Limits too Broad?
Generally, if a non-agreement agreement (or non-solicitation agreement) attempts to prohibit the employee from engaging in too many different types of activities, the courts are not willing to enforce them, since they would effectively prevent an employee from earning a livelihood.
What if a Non-Competition Agreement or Non-Solicitation Agreement is Unenforceable?
If a court finds a non-competition (or non-solicitation) agreement illegal and unenforceable because it is too broad, it will generally set it aside so that it has no legal effect on the employer and employee. In other words, if a court set asides a non-competition agreement, it would generally mean the employee is free to openly compete with their employer, such as by joining a competing company.
Most importantly, the general rule is that the courts will not fix an unreasonably broad non-competition agreement (or non-solicitation agreement) by severing or “watering it down” to comply with the law (e.g., to reduce a 5-year non-competition agreement to a 1-year non-competition agreement).
Further, the courts in Canada are generally more inclined to enforce a non-solicitation agreement than they are to enforce a non-competition agreement. In other words, the courts will typically not enforce a non-competition agreement if a non-solicitation agreement would properly protect an employer’s interests.
For example, consider a car salesman working for a “ABC” dealership in the Etobicoke area of Toronto. If a non-solicitation clause limits him from soliciting clients anywhere in Ontario for 3 years after leaving ABC dealership, that might be an unreasonably long time and overbroad geographic area to limit the employee’s post-employment activities. On the other hand, if the non-solicitation clause is limited in scope to only to the City of Toronto for a 6-month duration, the court would be more likely to find it reasonable and therefore enforceable.
Employer Remedies
If an employer is successful in enforcing a non-competition agreement (or non-solicitation agreement), it would generally be entitled to a range of remedies, including monetary damages (or compensation) or injunctive relief (court order requiring the employee to comply with its obligations).
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In a termination of employment and severance package, the amount of the pension loss is important to consider when evaluating the true value of the employer’s severance offer.
Understanding a termination letter or severance package often requires understanding the impact on your employee pension plan. If you think that your employer is not compensating you fairly for your pension in your termination package, please call Bune Law to discuss your rights and options. To speak with an experienced employment lawyer, please contact 647-822-5492.
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