What is a non-competition clause?
A non-competition (or non-compete) clause is a passage in an employment contract which purports to prohibit employees from working for another employer or starting their own business which competes with their employer during and after employment.
Without a non-compete clause, there is no prohibition against an employee competing with his or her former employer. Unlike non-solicitation and confidentiality covenants, a non-compete clause will not be implied into an employment contract.
What does a non-compete clause look like?
For example, a non-compete clause might look something like this in an employment contract:
The employee will not, without the prior written consent of the employer, at any time for a period of … months … within …, compete with the employer. For greater reference, the employer is in the business of X, Y, and Z. The employer’s competition includes but is not limited to A, B, and C. The employee confirms…. This is a reasonable restriction considering…. (call a lawyer for an actual non-compete clause – parts of this non-compete are omitted to prevent duplication).
Are non-compete clauses enforceable?
Updated Note: In October 2021, the Government of Ontario introduced legislation that would make non-compete clauses illegal in Ontario. The only exception would be when a business owner sells his or her business and he or she becomes employed by the buyer. Therefore, in almost all circumstances, non-competes will be illegal in Ontario when this legislation is passed.
Unless a non-compete clause is perfectly drafted in a strict and narrow manner, and there is a public interest in restraining such competition, a non-compete clause will be unenforceable for being a “restraint on trade”.
The courts have taken a double-edged approach in their refusal to enforce most non-compete clauses on the basis of promoting trade. On one edge of that sword, the courts have favored the liberty of individuals to work as they please. On the other edge of that sword, the courts have protected the interests of the community by refusing to enforce non-compete clauses because such restrictive covenants prevent individuals from making a living and contributing to society and the tax base.
What does an enforceable non-compete clause look like?
Enforcement of a non-compete is the exception, not the rule. Nonetheless, the courts have carved out a test in concluding whether a non-compete is enforceable (i.e. is a reasonable restraint on trade so as to protect the legitimate business interests of the employer). Such a non-compete clause must:
- Be limited in length;
- Be limited in geography;
- Generally, list the prohibited activities;
- Have clear, not vague or ambiguous language; and
- Generally have a public interest in enforcing it.
How long should a good non-compete clause be for?
The temporal length of a non-compete clause should not be long. Generally, it should not be longer than one year. Most courts refuse to enforce any non-compete clause longer than a year. It is submitted that to be on the safe side, a non-compete clause should be six months.
That is not to say that certain very long non-compete clauses will not be enforced. In considering whether a lengthy non-compete clause has a reasonable temporal restriction, the courts will consider the occupation of the employee and any special business considerations of the employer. For example, in one case, Hreff Jones Canada Inc. v. Todd (1996), 20 C.C.E.L. (2d) 190 (Alta. C.A.), a four-year non-compete was enforced where the employees were salespeople selling class rings etc. to colleges. The court found that the nature of the solicitation of the colleges required that commitments with those institutions needed to be made years before the rings etc. could be produced. Therefore, the length of time required to legitimately protect the employer was reasonable considering the circumstances.
What is the geographic restriction of a good non-compete clause?
The geographic region of a non-compete clause should not be too broad. A solid non-compete clause should not prevent the employee from working where the employer has no business (i.e. “all of Canada”). In addition, a non-compete clause should not be so broad so as to prevent the employee from working in one city altogether (i.e. “within 100km of the radius of the city of Toronto”).
For example, in one case, Ernst & Young v. Stuart, 1994 CanLII 2426 (BC CA), the court refused to enforce a non-compete clause which stated that an accountant could not practice accounting within a radius of 50 miles of the firm for one year. That radius the court found was the commercial heart of the province. Thus, the accountant was, practically speaking, unable to practice his profession. The court found that to be an unreasonable restriction for the protection of the employer.
Cautionary Note for Employers
If an employer wants a non-compete clause, it better be prepared to pay for it down the road. In wrongful dismissal lawsuits, courts have considered the existence of a non-competition period in determining the period of reasonable notice. For instance, In Ostrow v. Abacus Management, 2014 BCSC 938 (CanLII), the court considered the presence of a non-competition clause in extending the reasonable notice period.
Accordingly, employers should not just blindly by boiler-plate insert into their employment contracts a non-compete clause for each and every employee. Employers should only contract a non-compete clause where it is necessary to protect their legitimate business concerns. And they should know that it could come back to cost them additional pay in lieu of notice in case of termination for such a post-employment restriction.
Jeff is a lawyer in Toronto who works for a technology startup. Jeff is a frequent lecturer on employment law and is the author of an employment law textbook and various trade journal articles. Jeff is interested in Canadian business, technology and law, and this blog is his platform to share his views and tips in those areas.