Do You Have a Non-Compete Clause? What You Need to Know feature image

Do You Have a Non-Compete Clause? What You Need to Know

Employment contracts often contain clauses and provisions that prevent employees from doing certain things if their employment is terminated, regardless of who terminated it (i.e. the employee or the employer). One such clause is called a non-compete clause (or a non-competition clause as they are often called). This week, we explore what employers and employees need to know about a non-compete clause in their employment contracts.

What is a Non-Compete Clause?

Essentially, a non-compete clause is intended to prohibit an employee who leaves the company or business from entering into or starting a position similar to the one they just had, or work for a direct competitor. Such clauses work to prevent the departing employee from exploiting confidential knowledge they have of the business or company and using it to their or their new employer’s advantage.

Non-compete clauses can be included in the terms of an employment contract or can be a separate agreement signed at the time you enter into your employment contract.

It is important to note that non-compete clauses are different than non-solicitation clauses.  A non-solicitation clause is typically used to prevent former employees from soliciting the business of the clients of the former employer.  Non-solicitation clauses can be included on their own or used in conjunction with a non-compete.

Industries that often see these types of clauses include:

  • Law
  • Technology and innovation (technology, software, gaming, apps, etc.)
  • Sales; and
  • Pharmaceutical.

While some companies will have all employees sign these types of agreements or include these clauses in their general employment contracts, many companies only require specific individuals to sign these agreements. In these situations, we are looking at those in high-level positions, such as CEOs, Presidents, CFOs, COOs, etc. These individuals are generally privy to more confidential information than other employees, and therefore it is more important to ensure that they do not use or release that information to the companies’ competitors.

Are These Types of Clauses or Agreements Enforceable in Canada?

 The short answer is, it depends. Non-competes (and non-solicitation agreements) are considered “restrictive covenants.” As their name suggests, restrictive covenants seek to restrict the actions of the former employee and can be quite punitive, depending on how limiting they are.

In Canada, courts will enforce non-compete and non-solicitation agreements or clauses as long as they are not overly broad in their scope or timing, and as long as they do not contain any ambiguity. A restrictive covenant that is too broad in the type of business activity it seeks to restrict, the geographic area a former employee is not allowed to operate or work in after their departure, or the length of time a former employee is not permitted to engage in certain business activity will likely not be enforced.

Strict non-compete clauses are by default not enforceable. These clauses are the type of clauses that say explicitly “you cannot work for X or Y for N years.” The courts will often require these clauses to be rewritten so they are not “strict.”

What Does This Mean for Employers?

An employer who seeks to use a non-compete or another restrictive covenant must make sure they are very carefully drafted. Great care needs to be taken when considering asking someone to sign such an agreement and this should not be undertaken without the assistance of a knowledgeable employment lawyer. The language needs to be broad enough to ensure coverage of the necessary material, but not overly broad that it could prevent the employee from finding work elsewhere.

What Does This Mean for Employees?

Similarly, employees who are being asked to sign a non-compete should also carefully review the language in the clause or agreement and seek the advice of an employment lawyer before signing or finalizing anything.

In some situations, there may be conflicting language between the non-compete clause, and another clause in the agreement that may affect the terms of the non-compete. For example, the non-compete clause may have an expiry date, but elsewhere in the agreement, or in another document that is relevant to your employment, it may say you cannot compete with the company ever.

In 2009, CN Rail CEO Hunter Harrison retired. His employment contract had a non-compete clause, which explicitly forbade him from working for a competitor. That clause expired at the end of 2011, which should have technically permitted him to work for a CN competitor after that time. However, in a separate and more restrictive provision that was attached to his pension and retirement agreement, the language forbade him from ever competing with CN and that he could potentially lose his pension benefits if he did so.  Such a situation shows that these clauses are not necessarily that straightforward.

Given the serious consequences that a non-compete clause or agreement may have, it is important to be careful in drafting them, but it is equally important to take care before signing one. A skilled employment lawyer can assist in the drafting and analysis of these types of restrictive clauses and agreements. At HMC Lawyers, we have the skills and experience to help ensure your company and your interests are protected. Contact us online or call 1-800-480-3534 to make an appointment. With offices in Calgary, we represent professionals in Calgary, throughout Alberta, and across Western Canada.

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