Restrictive Covenants 

Successful professionals often find themselves interested in entrepreneurship. A natural field in which to begin one’s career as an entrepreneur is the one in which you are experienced. However, employees who seek to leave a job and start their own business in the same or related field may face legal hurdles in doing so.

For example, many employers include certain restrictive covenants in employment contracts. These clauses are intended to limit the ability of ex-employees to work in the same field or geographic locale, or from soliciting previous clients, for a specific period. Common restrictive covenants in employment agreements include non-solicitation, non-compete, and confidentiality clauses.

The focus of this blog post will be non-compete clauses, which have become commonplace in a number of different employment relationships, from the high-tech world to fast food chains. The clauses are generally intended to restrict departing employees from accepting paid work in the same or similar sectors to that of their previous employer.

Modern Outrage

In 2016, newspapers and magazines from the Washington Post to Fortune covered the story of the prevalence of non-compete clauses in employment contracts in the United States. What made the story so startling was that fast food workers were the target of the clauses. The non-competes were allegedly being used at American sandwich chain Jimmy John’s to prevent low-wage workers, including janitors and food workers, from accepting employment at any restaurant or business where the sale of sandwiches represented 10 percent or more of the company’s revenue.

The story highlighted issues facing employees across a spectrum of different industries. Employees are often faced with two options: sign a non-compete and limit their future mobility or turn down an employment opportunity.

Non-competes in Canada

Non-compete clauses can arise in any employment relationship and are typically set out in the written employment agreement. One major consideration for Canadians who are interested in starting their own business may be the applicability and enforceability of non-compete clauses from previous employers. Previous employers may see a departing employee’s new business endeavours as sufficiently tied to the employee’s industry and therefore subject to a non-compete clause.

The threat of a legal battle over non-competes might dissuade some cautious entrepreneurs from advancing their new and inventive ideas. The enforceability of non-compete clauses in Canada, however, is quite constrained. Canadian courts have frequently shot-down non-compete clauses for reasons including overbreadth, ambiguous terminology, unreasonable geographic limits, and unreasonable time limits.

In assessing the applicability and enforceability of non-compete clauses in written contracts, courts in Canada have generally found the covenants to be an unacceptable restraint on trade and, as such, that non-competes are prima facie unenforceable. In order to enforce a non-compete clause, an employer generally must show that the clause was used to protect a proprietary interest, that the temporal or spatial features of the clause were not too broad, that the covenant is not against competition generally, and that a non-solicitation clause would not have been sufficient in the circumstances. Frequently, Courts will look to see if the intended effect of the non-compete clause could have been accomplished through other means, namely non-solicitation or non-disclosure clauses.

The relatively stringent nature of this test might bring some comfort to ex-employees who are subject to these terms and looking to start their own business in similar industry to that of their previous employers. While non-competes may seem like a hindrance to innovation, Canadian courts’ apprehension to uphold these covenants may render these covenants moot when present in an employment contract. Nonetheless, it is always best practice to comply with contractual obligations as ignoring them always creates legal risk and can lead to costly disputes.

Outgoing directors of a company face unique considerations. While non-compete clauses face limitations in enforceability, ex-directors of a company may nevertheless continue to owe a fiduciary relationship to their previous enterprise.

Conclusion

Ex-employees could still be restricted from operating their business in a manner that solicits prior customers or uses confidential information, trade secrets, or other protected resources that were gained through an employee’s previous experience. For this reason, ex-employees generally should understand the types of restrictive covenants they have signed and their applicability when the employment relationship ends.

As ex-employees embark on new careers, in particular when starting their own business in a related field, they should do their best to ensure that previous employment contracts will not stall their future endeavours. Often, the cleanest way for an outgoing employee to overcome a concerning non-compete clause is to disclose their intentions to their employer and seek written consent to start or join a competing business. However, the fact that a non-compete may be unenforceable can be a source of leverage in this conversation.