Covenants in restraint of trade, such as confidentiality, non-solicitation and non-competition covenants, are presumed to be unenforceable as against public policy. However, it is possible to rebut this presumption by showing that the particular covenant in question is reasonable. The Supreme Court of Canada’s decision in J.G. Collins Insurance Agencies Ltd. v. Elsley Estate1, established a three part test for assessing the reasonableness of a restrictive covenant as follows:
1. Does the party relying upon the provision have a legitimate proprietary interest entitled to protection, having regard to the nature of the business and the character of the employment?;
2. Are the temporal or spatial features of the covenant too broad, having regard to the nature of the proprietary interest, and its overall fairness to both parties?; and
3. Is the provision is reasonable in terms of public interest?
Each restrictive covenant must be crafted to address the particular circumstances of each case, and to meet the “reasonableness” requirements. A “cookie-cutter” approach to drafting these agreements is generally discouraged. Rather, the following considerations should be made when entering into any restrictive covenant with an employee:
- Timing – Ensure that there is sufficient “consideration” for the restrictions by including the restrictive covenants in the offer of employment or making an offer of employment conditional upon the employee executing a separate agreement prior to commencing employment.
- Type of Covenant – Avoid using a non-competition clause where a non-solicitation clause will sufficiently protect the interests of the employer.
- Scope of the Covenant –
- Although confidentiality covenants are generally considered the least restrictive, they are still subject to the same reasonableness requirements. Therefore, when defining “confidential information” the type of documents, data, formulas etc. that are available to the employee should be specifically included and information that is available in the public domain should be specifically excluded.
- Distinguish between the solicitation of employees, customers and prospective customers.
- Where applicable, consider listing 3 or 4 specific customers that the employer seeks to protect from solicitation by the departing employee. Such a clause is much less likely to be considered “overreaching.”
- A non-competition provision should be specific to the employee’s role in the business at the time of departure. Avoid trying to protect anticipated or future businesses as it has been held unreasonable to prevent an employee from competing in undefined future activities.
- Keep in mind that the length of time that is considered “reasonable” can often be related to the length of time needed for the employer to solidify its position after the employee leaves.
- While broad geographic restrictions have been upheld, the territorial scope of a restrictive covenant should only capture the area that is relevant to the employee’s position.
If the above considerations are made at the time of drafting, it is more likely that, if challenged, a restrictive covenant will be viewed as reasonable in scope, and enforceable. At the end of the day, the employer is well advised to consider exactly what is it attempting to protect, and how that can be achieved with a limited restriction that does not prevent the departing employee from earning a livelihood in his or her chosen field.