By Carly Harris
Restrictive covenants are often found in employment contracts and can be a useful tool to reduce the impact on your business when an employment relationship comes to an end. A restrictive covenant is an agreement that imposes a restriction on one of the parties of the contract that prevents that party from doing something. This is very useful in some industries, such as real estate, to prevent an employee from soliciting clients of their former employer after leaving the company.
The term “restrictive covenant” typically refers two types of contractual clauses: non-solicitation and non-competition.
A non-solicitation clause prevents the employee from soliciting other employees and customers or clients from their former employer when the employment relationship comes to an end.
A non-competition clause restricts the employee from directly competing with the employer for a specified period of time and within a specified geographical location.
Court Treatment of Restrictive Covenants
To determine the validity of a restrictive convent, courts must do an overall reasonableness assessment of the clause, the agreement in which the clause is found, and all the surrounding circumstances.
The court will then balance the importance of the public interest in discouraging restraints on trade with the right to contract. The court will examine the character and nature of the employment, whether the restrictive covenant is reasonable in terms of geographic limits, time limits, and the nature of the prohibited activity, whether it is ambiguous, whether the employer’s proprietary interest in question is entitled to protection, and whether it is unenforceable as being against competition generally.
Non-solicitation clauses are difficult to enforce if drafted too broadly. Therefore, it is critical to ensure that the clause is suitably restrained in terms of temporal limits and spatial limits. In the Kerzner v. American Iron & Metal Company Inc. (2018), the Ontario Court of Appeal set out that non-solicitation clauses no longer require geographical limits where they apply to all or some of a vendor’s customers.
Courts are reluctant to enforce non-competition clauses in the employment context and will refrain from doing so if a non-solicitation clause would adequately protect the interests of the employer. Again, it is important to ensure that non-competition clauses are drafted narrowly to increase the chance of enforcement by the court.
Overall, restrictive covenants can be extremely useful to employers when an employment relationship comes to an end. Simmonds Law can provide you with assistance to draft an employment contract that includes restrictive covenants.
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