Restrictive covenants are clauses that an employer may include within an employment contract for the purposes of protecting their business interests by restricting what an employee can do during, and/or after, employment. These clauses usually pertain to matters such as confidential information and customer data.
In this blog entry, we will discuss the most common type of restrictive covenants that employers may wish to include in their employment agreements.
Types of restrictive covenants
Confidentiality clauses
Confidentiality or non-disclosure clauses are generally drafted to prevent a departing employee from disclosing confidential information belonging to the employer, such as customer lists, trade secrets and company data bases.
Non-solicitation clauses
Non-solicitation clauses are generally drafted to prevent the departing employee from utilizing confidential information or relationships created while formerly employed, to solicit or recruit customers, clients and/or employees from their previous employer.
Non-compete clauses
Non-compete clauses are generally drafted to prevent to the former employee from competing with the previous employer. Generally, the purpose of this clause is to restrict the former employer from competing with the previous employer for a specific time as well as within a specific geographic location.
Are restrictive covenants enforceable?
Generally, confidentiality clauses that seek to limit the employee’s use of the employer’s confidential information only are considered enforceable. For employers, the best practice is to convey to your employees with a high degree of specificity what information is considered confidential, and consistently enforce those guidelines.
In regard to non-solicitation clauses, the courts will generally scrutinize these clauses to ensure that are reasonable, and only exist to limit real losses that may be incurred by the employer. The reasoning for this is that non-solicitation clauses may affect the departing employee’s ability to earn a living in their field of expertise.
Further, non-compete clauses, generally receive the most stringent review from the courts because they prevent the departing employees from working in a particular field of work for a fixed time. For employers to enforce this clause, they have the burden of proof to show the following:
- The non-compete clause is necessary to protect the employer’s legitimate business interests;
- The non-compete clause covers a reasonable length of time and geographic area, and the prohibited post-employment activities are not too broad; and
- A non-solicitation clause would not adequately protect the employer’s legitimate interest in the circumstances.
The future of restrictive covenants
As of October 27, 2021, Ontario is considering introducing legislation to prohibit employers from utilizing non-compete clauses in their employment contracts. The purpose of the proposed legislation is to grant employees more mobility within the workforce.
The proposed ban is slated to be a part of Ontario’s Working for Workers Act 2021, which would make it the first province in Canada to ban non-compete clauses within employment contracts.
As of October 27, 2021, confidentiality and non-solicitation clauses will not be affected by the new proposed legislation.
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