Restrictive Covenants – Part 1 of 3:

To Restrict or not to Restrict – that is the Question

Employers often put restrictive covenants, such as non-competition or non-solicitation clauses, into their contracts as a matter of course. However, courts interpret such clauses narrowly and require that they meet rigorous criteria to be enforceable.

Additionally, professionals in particular may have duties mandated by their regulators that complicate the use of restrictive covenants.

If you are a professional who is an employer, should you put a restrictive covenant into your employee’s contract? If you are a professional who is an employee, does it matter if your employer puts a restrictive covenant into your contract?

Key Considerations

a. Non-Competition Clauses are Rarely Enforceable

In Ontario, the Employment Standards Act has made it illegal to restrict employees from competing against their employer, except in two cases, for high level executives and as part of a sale of a business. There are strict conditions for these exceptions.

This prohibition does not apply to contracts made prior to October 25, 2021. That said, courts have and will interpret these clauses very narrowly, even where they are not prohibited by legislation. This is particularly true where employers are professionals who are trained and registered to perform a certain job

b. Non-Solicitation Clauses may Conflict with Professional Responsibilities

Regulated professionals have duties to their clients that they cannot contract out of. For example, when they leave a workplace, regulated professionals must ensure that records are stored securely, that clients are notified of their options for future services, and that the services are not interrupted by their departure. Regulated professionals must put a client’s needs above both their own and their employer’s economic interests. All these duties may come into conflict with restrictive covenants, even if those covenants comply with common law principles.

c. Restrictive Covenants will be Interpreted against the Interests of the Drafting Party

Any ambiguities in contracts are interpreted against the interests of the drafter of the contract. Courts recognize that the drafter has more power and control. Courts are likely to invalidate vague or overly broad restrictive covenants.

Takeaways

As a professional who is an employer, consider whether you really need a restrictive covenant in your employment contracts. There are valid reasons to have those provisions in place, but contracts should be drafted narrowly to respond to those situations.  Once you have established that you need a restrictive covenant, seek legal assistance to draft your contracts.

As a professional who is an employee, take a moment to review your employment contract before signing it. You do not want to sign anything that will put you in conflict with your professional regulator or make it difficult for you to work if you leave your employment. It is always worthwhile to get legal advice before signing an employment contract.