If you’re a business owner or an employee, you might have come across the term “restrictive covenants.” In essence, these are contractual clauses that limit an employee’s ability to compete with their employer or work for a competitor after they leave a company. They can also be called “non-compete agreements,” “non-solicitation agreements,” or “confidentiality agreements.” In this blog post, we’ll explore everything you need to know about restrictive covenants and their application in Ontario, Canada.
What are restrictive covenants?
Restrictive covenants are contractual clauses that place limitations on an employee’s activities during and after their employment period. These clauses usually prevent employees from working for a competitor or from soliciting customers or employees from their former employer. They can also prohibit employees from disclosing confidential information about their former employer’s business practices.
These clauses can be included in employment contracts, severance agreements, or as standalone agreements. Their purpose is to protect a company’s business interests, including its intellectual property, trade secrets, and customer base.
What are the types of restrictive covenants?
There are three main types of restrictive covenants: non-compete clauses, non-solicitation clauses, and confidentiality clauses.
Non-compete clauses prevent employees from working for a competitor for a specified period after leaving their current employer. Non-solicitation clauses prohibit employees from soliciting their former employer’s clients or employees for a specified period after leaving their current position. Confidentiality clauses prevent employees from disclosing confidential information about their former employer’s business practices.
Are restrictive covenants enforceable in Ontario, Canada?
In Ontario, Canada, restrictive covenants are enforceable only if they are reasonable and necessary to protect a company’s legitimate business interests. Courts will consider the duration, scope, and geographic area covered by the covenant, as well as the employee’s seniority and level of responsibility, when determining its reasonableness.
The employer must be able to demonstrate that the covenant is necessary to protect its business interests, and the employee must receive reasonable compensation in exchange for the covenant. Courts may also consider the employee’s ability to earn a livelihood when assessing the enforceability of the covenant.
It’s worth noting that a restrictive covenant that is too broad or unreasonable may not be enforceable. For example, a covenant that prohibits an employee from working for any competitor in Canada for five years may be considered too broad and, therefore, unenforceable.
What should you do if you’re asked to sign a restrictive covenant?
If you’re asked to sign a restrictive covenant, it’s essential to read and understand the terms of the clause before signing. If you have concerns about the scope or reasonableness of the covenant, you may want to consult with an employment lawyer before signing.
If you’re an employer, it’s important to ensure that the restrictive covenant is necessary to protect your business interests and that it’s reasonable in scope and duration. You should also ensure that the covenant is drafted clearly and precisely to avoid ambiguity or confusion.
Conclusion
In conclusion, restrictive covenants can be an essential tool for protecting a company’s business interests. However, they must be reasonable and necessary to be enforceable in Ontario, Canada. Employers should draft these clauses carefully, and employees should review them carefully before signing. If you have any questions or concerns about restrictive covenants, it’s always best to consult with an experienced employment lawyer.