The (Un)Enforceability of Employee Non-Compete and Non-Solicit Agreements

A restrictive covenant is a contractual limitation imposed on the employee’s activities, beyond the duties already owed by the employee at common law. Depending upon the employer’s legitimate business interests, the common law may not sufficiently protect the employer from potential harm.

The use of restrictive covenants may be appropriate in circumstances:

• • Where the employer is operating in a highly competitive industry.

• • Where the employer is operating in an industry with high customer mobility.

• • Where the employee is exclusively responsible for closely fostering and developing important customer relationships.

• • Where significant harm will result to customer relationships, goodwill or trade connections should the employee depart the company and continue to work elsewhere in the industry.

• • To provide assurance to potential purchasers that the company’s continued goodwill and client base will be maintained into the future.

The types of restrictive covenants that are most commonly utilized in the employment context include:

• • A confidentiality or non-disclosure (“non-disclosure“) covenant, which typically prohibits an employee from disclosing confidential information about the employer which was learned by the employee during the course of the employment relationship.

• • A non-solicitation (“non-solicit“) covenant, which typically prohibits an employee from soliciting the clients, customers, employees and any others with whom the employer has had business dealings.

• • A non-competition (“non-compete“) covenant, which typically prohibits an employee from starting a business which is competitive to the employer or accepting work/becoming the employee of a business which is competitive to the former employer.

Restrictive Covenants are Prima Facie Illegal, but this Presumption is Rebuttable where the Restrictive Covenant is Reasonable

To be enforceable, the restrictive covenant must be a reasonable balance between the parties and the public interest of avoiding restraint of trade. Reasonableness is assessed from the time of that the covenant was entered into, not the time of termination.

To be reasonable, the restrictive covenant must be all of the following:

• • Clear and unambiguous: The person against whom the clause will be enforced (the employee) must know precisely what they are required to do or refrain from doing.

• • Linked to the protection of the employer’s legitimate proprietary interest: Legitimate proprietary interests include client relationships, trade connections, goodwill and confidential information
  • Reasonable in terms of:
    

    o   Geographic scope: The smaller the geographic scope, the more likely that the restriction will be reasonable. If the geographic area is larger than is reasonably required to protect the employer’s legitimate business interests, the entire clause will be unenforceable.

    o   Temporal scope: The temporal scope of the non-compete or non-solicit clause must be limited to what is adequate to provide the employer with a reasonable period of time during which it can secure or re-establish its relationship with its customers, or otherwise solidify the relationship of the departing employee’s replacement with its customers, after the departure of its former employee.

    o   The activities being restricted: The activities and scope of business being restricted should be limited to only what is “reasonably necessary” to protect the employer’s interests.  

If a restrictive covenant fails to meet any part of the above test, it may be deemed illegal and unenforceable.

Further, courts will give a non-disclosure clause significantly less judicial scrutiny than a non-solicit or a non-compete clause. Unlike a non-solicit clause or a non-compete clause, a non-disclosure clause need not have a geographic scope and may be for a longer or indefinite duration.

Effect of Restrictive Covenants on Reasonable Notice Period and Mitigation

Where there is evidence that the existence of the restrictive covenant has made it difficult for the employee to find alternate employment, the court may consider this evidence in determining whether the employee satisfied their duty to mitigate

If the employer seeks to rely upon a restrictive covenant to prevent the employee from contacting its competitors post-termination, the employer cannot claim the employee failed to mitigate their reasonable notice damages if the employee did not to accept a job offer from the competitor during the notice period.

Evidence that a restrictive covenant made it more difficult for an employee to find comparable employment may be relied on by a court to extend the employee’s common law reasonable notice period.

Conclusion

Restrictive covenants can be a complicated area of the law.  You should have any agreement containing a restrictive covenant reviewed by an experienced employment lawyer prior to entering into it.

If you are subject to a restrictive covenant, or if your employment has been wrongfully terminated by your employer and a restrictive covenant is preventing you from finding alternative employment, you should contact an employment lawyer to determine your options, whether that be to challenge the enforceability of the covenant or seek greater wrongful dismissal damages in light of the covenant.

Our employment law lawyers are experts on the subject matter, having successfully litigated a number of restrictive covenants in the employment and commercial context, and would be happy to assist you.