Restrictive Covenants: What Are They and What Do They Do?
Restrictive covenants. The
non-competes, non-solicits, and other related contractual terms that are frequently sought by companies to ensure that their employees, should they ever leave them, cannot have anything to do with their clients, workers, or even the industry at large.
From my experience, this less than glamorous topic doesn't attract much excitement from clients and is often accompanied by a lengthy, legalistic explanation as to what a client can and cannot do with these specialized contractual terms.
In an effort to potentially circumvent some of this explanation in the future, the intention of this article is to provide a brief, plain-language commentary on what restrictive covenants are, how they can be used, and the limitations that will govern their use in the employment context.
At the most basic level, a restrictive covenant is a contractual promise that a party will not do something. This promise, if correctly implemented, will have been provided in exchange for some form of “consideration,” which is something of value provided to the other contractual party. This could include a monetary payment, wage increase, new employment, or even a corresponding promise for the other party not to do something in return.
The two most common forms of restrictive covenants are the "non-solicit" and the "non-compete." A non-solicit works to prevent an employee from poaching a company’s clients, employees, or contractors away from it for the employee’s, or their new employer’s, benefit. On the other hand, a typical non-compete will require an employee to refrain from working for businesses similar to or in competition with their former company.
Although these concepts appear fairly straightforward on the surface, there is an underlying body of case law that confirms the situations in which these clauses can be used and the limits of their use. It bears mentioning here that the limitations on these clauses in the employment context will be much greater than those that would normally be applied in a commercial setting. Similarly, these restrictions will face a significantly higher level of scrutiny from the courts if ever challenged (i.e. they need to be well-drafted, clear and precise).
Legal decisions on this topic have also repeatedly confirmed that restrictive covenants are, as a starting point, unenforceable on the basis that they are a “restraint on trade.” In the employment context, this concept speaks to the ideal that employees should not be restricted from being able to freely ply their trade and work for whomever they wish.
Restrictive covenants can, however, be enforceable in situations where a company has legitimate proprietary interests requiring protection, but only provided that these contractual restrictions are justifiable on the basis of “reasonableness”. This somewhat vague concept has been confirmed by the courts to mean that restrictive covenants must be reasonable in terms of (a) what the employee is restricted from doing; (b) the geographic scope of the restrictions; and (c) the duration of the restrictions.
In the event a restrictive covenant is challenged by an employee or is sought to be judicially enforced by a company, a court will be required to consider the reasonableness of the restrictive covenants, on each of these listed grounds, in specific relation to the company’s business and the facts of the employee’s employment.
With respect to the company’s situation, the court may look at the industry and the geographical area in which it operates, whether its business depends on confidential information or intellectual property, and the likelihood that its clients would leave it for a competitor. As for the employee, some considerations that can be relevant to the court’s analysis may include the employee’s position, the degree of their exposure to clients, and the areas in which they operate, both geographically and within their employer’s organization.
Ultimately, these considerations all work towards ascertaining the extent of the company’s vulnerability to its employee should they leave the organization. This is to ensure that the restrictions being sought by the company through the restrictive covenants are limited to only those which are truly necessary to protect its business and proprietary interests.
In addition, as general rule, the courts will not enforce a non-compete clause in situations where a non-solicit would be sufficient to protect a company’s interests. This relates to the fact that a non-solicit clause is inherently less oppressive than a non-compete, since they specifically apply to a company’s clients and workers rather than creating a blanket prohibition from working in a given industry.
Now in attempt to put this into some context, if an employee holds an unskilled or low-level position, with minimal if any client contact, it would be difficult to justify any form of restrictive covenant against them. In contrast, in situations where an employee holds a managerial or leadership position, is involved in a company’s research and development efforts, or is responsible for developing and maintaining client relationships, there could be viable grounds for expansive restrictions to be enforceable against them.
Closing with some practical advice, if an organization is looking to implement restrictive covenants against its employees, whether through employment agreements or otherwise, consideration should be given to the factual necessity of the restrictions, including their geographic scope and applicable duration. If these restrictions are not appropriately tailored to an employee’s circumstances, there is a strong likelihood that they could be found to be unenforceable by a court if ever challenged. This, of course, would deprive the company of the protections it thought it had bargained to contractually obtain.
Alex Hunt is an associate at Parlee McLaws LLP, in Edmonton, Alberta, and mainly practices in the area of employer-side labour and employment law. His practice consists of regularly assisting provincially and federally regulated employers in litigating employment disputes, preparing and vetting all manner of employment-related contracts and policies, and addressing and strategizing for statutory compliance, termination, privacy, human rights, and disability issues.