Many of our recent articles have focused on decisions involving employees’ breaches or threatened breaches of restrictive covenants. Including restrictive covenants, such as non-solicitation and non-competition covenants, into employment contracts is important for employers to protect their business interests. In order to be enforceable, however, such covenants must be tailored to the specific business needs of the employer and the context of the individual employment relationship. This article steps back and takes a look at the governing principles.
Is the restriction reasonable?
Restrictive covenants must be reasonable, unambiguous, and suitably limited in terms of scope, territory and duration.
In order to determine if the covenant is reasonable, courts will examine both:
- the circumstances regarding the nature of the business to be protected by the covenant, including confidential information and trade secrets; and
- the role of the person to be bound by the covenant, including whether he or she was an ordinary employee, whether his or her activities were integral to the business, or whether he or she was in a position of influence.
Non-competition provisions more broadly prohibit competition with the employer’s business. Non-solicitation provisions usually impose restrictions on solicitation of the employer’s customers or employees. In the employment context, restrictive covenants are subject to stringent scrutiny as to reasonableness and courts are less likely to enforce a non-competition provision where a less intrusive non-solicitation clause will suffice to protect the employer’s business interests.
Another element of the judicial analysis is that the (i) scope of the activities prohibited, (ii) territory covered by the covenant; and (iii) duration of the prohibition must all be seen to be reasonable. Restrictive covenants will be struck down if they are found to be unreasonable or otherwise contrary to public policy.
Is the restriction clearly defined?
Any restrictive covenant must also clearly define the prohibited activities, along with the territory and duration of the prohibition. Where a clause is found to be ambiguous, courts will generally not remove or rewrite the offending language in order to give effect to the presumed intention of the parties. Rather, the entire provision will be found to be unenforceable.
Take-Away for Employers
One size does not fit all when it comes to restrictive covenants in employment contracts. In order to be enforceable, such covenants must be carefully crafted to the specific circumstances of the business and the employee in question.