• Home /
  • Blog /
  • Employment Contracts and Restrictive Covenants

Employment Contracts and Restrictive Covenants

Posted on 25 Aug'14 Tags: , , in Corporate and Business Law, Employment Law

In today’s world of uncertainty, employers often need to find ways to minimise the potential harm that could be inflicted upon their business by former employees. All businesses generate and possess vital information, upon which their success lies. That inherent level of trust expected of employees to keep this information confidential, can easily be thrown out the window once that employment relationship ends. Restrictive covenants are one way for employers to protect themselves from this potential risk.[1]

A restrictive covenant in an employment contract attempts to limit or control the ability of a former employee to compete with the company or solicit its clients, future clients as well as current employees. It inhibits the former employee from using the company’s confidential information such as client/customer lists to further personal objectives. The law in this area however, is not so well defined and can be uncertain. It has been a topic of considerable judicial debate and varies from case to case.

The courts are careful to distinguish between covenants that arise in property matters and those in employer/employee contexts. Due to a general power imbalance in an employee and employer relationship, more scrutiny has been applied to these covenants, as opposed to contracts with the sale of a property.[2] As a result, employers must be careful as to how they word their contracts to obtain the protection they seek and employees on the other hand, should be vigilant when entering agreements, so as not to hinder their future professional endeavours.

It was established by Dickson J. in the case of J.G. Collins Insurance Agencies Ltd. v. Elsley Estate [1978] 2 S.C.R. 916 that a restrictive covenant in an employment contract is enforceable “only if it is reasonable between the parties and with reference to the public interest.” A restriction is void if it places a restraint on trade or is contrary to public policy. This has caused the courts to be caught in the middle of maintaining free and open competition while also providing an arena for individuals to exercise the right to contract. The test of reasonableness thus depends on the circumstances of each particular case.

Brenner J. in the case of Aurum Ceramic Dental Laboratories Ltd. V. Hwang [1998] B.C.J. No. 190 (S.C.) set out the test for reasonableness for a covenant imposing post-employment restraint on trade. Such a covenant is reasonable if it:

  1. protects a legitimate proprietary interest of the employer;
  2. the restraint is reasonable between the parties in terms of: temporal length, spatial area covered, nature of activities prohibited and overall fairness;
  3. the terms of the restraint are clear, certain and not vague; and
  4. the restraint is reasonable in terms of the public interest with the onus on the party seeking to strike out the restraint.[3]

A restrictive covenant that is unreasonable in its terms is deemed void and unenforceable. They are not read down by the courts to make them reasonable.[4] The courts also tend to distinguish between the two common types of restrictive covenants, namely non-solicitation and non-competition clauses. Generally, if a non-solicitation clause adequately protects an employer’s interest, it will be favoured over the non-competition clause, which will not be enforced.[5] A properly contracted non-solicitation clause allows an employer to be adequately protected, without compromising an employee’s ability to work in their chosen field in the future.

 

 

 

[1] Jason Hanson & Sandra Cohen, “Restrictive covenants in employment contracts: Canadian approach” (2011) 1 Practical Law Company.

[2] Shafron v. K.R.G. Insurance Brokers (Western) Inc., [2009] 1 S.C.R. 157

[3] Aurum Ceramic Dental Laboratories Ltd. V. Hwang [1998] B.C.J. No. 190 (S.C.)

[4] Shafron v. K.R.G. Insurance Brokers (Western) Inc., [2009] 1 S.C.R. 157

[5] Valley First Financial Services Ltd. v. Trach, 2004 BCCA 312, 30 B.C.L.R. (4th) 73

Disclaimer: The above article is not a legal opinion as every case is different and is only for general awareness. Please contact us for specific questions and legal advise.