Non-competes are increasingly common – but they have to be reasonable

Employees may be required to sign an employment contract as a term of employment. Typical employment agreements include the employee’s start date, payment terms, details of future increases or changes in remuneration, duties, the term of employment and the terms of dismissal.

As with most contracts, the common law and statutory rules must be respected. Consideration, meaning a promise of exchange of something of value must be made, there must be proper offer and acceptance and a contract must be in writing. Non-comps signed after employment has already started are seldom enforceable without additional consideration. Any employment contract that contains a non-competition clause should be reviewed by a qualified legal professional before signing.

The employment contract may also include, as part of the conditions of leaving/termination, a non-compete clause.  But are these clauses legal?  Are they enforceable?

Non-competition clauses must be as permissive as possible

As a general rule, non-competition clauses must be as permissive as possible:  They must allow the employee to work (in another organization), while protecting the employer should the employee leave their employ.  Certain positions may leave the employer open to increased threat of competition:  If the employer has provided the employee with intellectual property, proprietary training, confidential client information or other advantages that could be used against the employer after the employment relationship ends.

Typical non-compete clauses

Non-competition clauses are usually comprised of two components:

1. Geographic limitation.  In this case, former employees may be prohibited from working in the same industry within a certain geographical area.  So a salesperson whose territory may have been Toronto may not be able to sell the same products/services within Toronto.
2. Time period.  The former employee may be restricted from working within the same industry for a specific period of time following their departure from the employer. This is generally to prevent employees from ‘stealing’ clients when they leave a given employer.

What do the courts say?

• Generally speaking, Ontario courts have not enforced non-compete clauses when they are deemed to be too restrictive, but have upheld reasonable limitations on post-employment competition by former employees.
• What is ‘reasonable’ depends on the nature of the industry.  Dentists, for example, may require a certain neighbourhood to be off-limits to a former associate dentist – but only for a certain number of years. A software developer, on the other hand, may be prevented from working in a larger geographic area – like a country or even a continent – but, again, only for a certain number of years.
• The court may reduce the geographic or time constraints if they are deemed to be unreasonable. However, courts are usually unable to prescribe a ‘reasonable’ alternative, so when non-competes go to court, they either fail or succeed – they aren’t modified.  For this reason, employers may specify wide geographical areas and long time periods in their employment agreements, but provide alternatives in the event of a dispute.
• The courts have wanted to give autonomy to contracting parties and to permit them to contract any way they see fit but the courts have also been loath to encourage a limitation of a competition. This balance between competing concerns is reached when the geographic limitation and time limitation successfully achieved the objectives of both contracting parties. One is to foster a good and profitable relationship during employment and the other is to limit the resources from an employer being used against it to an economic detriment. The courts have only entered when that restriction to competition becomes unreasonable.

More questions? Don’t hesitate to contact us.

This blog is provided for educational purposes only and should not be construed as specific legal advice. This blog should not be used as a substitute for competent legal advice from a licensed professional lawyer in your province.