A negative covenant, generally known as a “restrictive covenant”, is a term in an employment contract which prevents the employee from certain activities following the end of employment.
There are three popular types of covenants which restrain, to varying degrees of severity, a person’s activities post-employment. These are:
- non-competition clause;
- non-solicitation clause ; and
- a confidentiality clause.
Negative covenants are used as a tool by which an employer attempts to protect its business interests, its customer base, confidential information, trade secrets, and its alleged propriety methods of doing business from past employees.
Just because these words appear in a contract does not mean that the terms are enforceable. In fact, in Ontario, all such terms are presumed to be void unless the employer can prove otherwise.
All Covenants Presumed Void
The employer seeking to enforce such covenants must pass a rigorous test to show why it requires such protection. The most difficult test to pass is that of the non-competition covenant, since such a term purports to stop an employee from competing with the business of the employer.
Often the employer will seek to use a non-competition term when a non-solicit would be an adequate means of protecting the employer’s interests. Generally, an non-solicit covenant is less demanding, as it typically requires an employee to refrain from soliciting business of the past employer, and/or from soliciting past employees or soliciting business with the suppliers of the former employer. Accordingly, such a covenant does not attempt to ban competition, but rather to control it. However, while a non-solicit term may, on its face, be less restrictive than a non-competition covenant, a non-solicit covenant must be used carefully by the employer since an overly ambitious restriction will lead to the demise of the protection that has been intended.
By example, a non-solicit term which restrains the employee from not only soliciting business but also accepting business will be viewed as a non-competition covenant and will face the more difficult test of enforcement. Similarly, the creation of a more encompassing form of a non-solicit which is not related to the actual business activities of the departed employee, but for example, purports to prevent the employee from soliciting business from “any client” of the employer, as opposed to clients known to him, will fail.
Generally speaking, the more precise the non-solicit may be and the more limiting its words are set to be, the greater likelihood is that it will be enforced.
Often, it is a foolish employer who believes that it the non-competition tool which will provide it the most effective protection. The reality is that the enforcement of a non-competition covenant is very difficult and very likely to fail. There are yet many other tools at the disposal of a creative employer, apart from the non-competition and non-solicit covenants.
The purpose of a confidentiality clause is to place restrictions on what information is prohibited from being used by the employer following the end of employment..
As is the case with other forms of negative covenants, a confidentiality clause is also presumed unenforceable at the outset of the analysis, albeit with the caveat that it is often an easier clause to enforce as there is no need to establish a “public interest” component.
Ultimately, as with other restrictive covenants, a confidentiality clause which is overly ambitious will run the risk of an adverse court finding that it is in unreasonable and hence unenforceable.
Reasonable restrictions as to the use of trade secrets, confidential information, and trade connections will be upheld.
This is not the moment to be copying contracts from the internet. Get advice on how to draft an enforceable contract and how to present it to the prospective or existing employee to create an enforceable obligation.
That which is written on paper may well not define your rights. Take advice before you sign and before you act. The stakes of being wrong on this issue can be enormous.
Get Advice Before You Act
This issue is not intuitive from either side. Contact the offices of Toronto employment and labour lawyers Mallins Law. We regularly advise employees and employers on legal workplace issues. Contact us online or by phone at 647-792-0310 to schedule a consultation.