Covenants can protect employers from departing staff
It’s not a secret anymore, nor is it any longer just a line corporations spit out to sound trendy — employees are a company’s most valuable asset.
As more organizations realize this, many are taking action to minimize the damage caused by a departing employee. One way to do this is through the use of a restrictive covenant in an employment contract.
In the context of employment law, restrictive covenants come in the form of non-competition and non-solicitation clauses. The former prevents a departing employee from competing with the employer and the latter prevents the employee from stealing customers.
Colin Gibson, a partner with the Vancouver law firm Harris and Company, said employers need to be careful when deciding which employees should be subject to restrictive covenants. Non-solicitation clauses are typically easier to enforce than non-competition clauses.
Non-competition clauses should be rare
Non-competition clauses should get the most scrutiny from employers, because courts are reluctant to enforce them. That’s because such clauses restrict an employee’s ability to find another job and earn a living.
“There is an overall reluctance to enforce them because they’re seen to be restraint of trade,” said Gibson. “(Courts are) always going to hold an employer’s feet to the fire, so you better show that you have a valid proprietary interest you need to protect and that you draft it narrowly so that you protect only that interest.”
A non-competition clause typically states an employee can’t engage in a similar business for a period of time within a certain geographic area. The most common mistake in drafting such a clause is making both the time and geographic area too broad.
Clauses that are too broad will be subjected to the “blue pencil” approach in court, said Gibson.
“If you’ve drafted your non-compete clause overly broad in terms of geographic area or time, the court won’t rewrite it for you,” he said. “They’ll simply strike it out.”
He said many employers hold the misguided opinion that every contract should have a non-compete clause.
“A lot of employers seem to think that they have the right to put a non-competition provision in the agreement, and some have it in all their agreements across the board,” said Gibson. “So we have to explain, ‘No, you’re going to have to justify that for every employee you’re seeking to apply it to.’”
A clause prohibiting an employee from contacting the employer’s clients for a set period of time after leaving the company is often viewed as a better, less restrictive option by the courts, said Gibson. In many cases, a non-solicitation clause will protect an employer’s interests adequately.
Restrictive covenants gaining in popularity
Restrictive covenants are becoming more popular because employers are realizing the obligation the common law imposes on employees is not sufficient to protect the employer’s interests, said Gibson.
He said employers that rely on things like good-faith duties of an employee or the additional duties of a fiduciary employee are often dissatisfied with the results from the court.
“If you’ve got a well-drafted contract, you can get rid of common law ambiguities,” he said.
Put clause in at time of hiring
Gibson said he understands there is a bit of a “honeymoon” mentality when an employment relationship starts, but dismisses the notion that a restrictive covenant would start the employment relationship off on the wrong foot.
“The counter argument is that’s the easiest time to get the employee to agree to those restrictions,” he said. “The employee is excited about the job opportunity, wants to come on board and is much more amenable to agreeing to what is going to happen when they leave than they would be five years later when you’ve fired them without cause.”
What’s new in restrictive covenants
Colin Gibson, a partner with the Vancouver law firm Harris and Company, said he’s seen a number of new developments recently in how employers are using restrictive covenants.
Dismissal without cause: Contracts are starting to use language that indicates the covenants are going to apply regardless of the manner of dismissal. So even if the employee is dismissed without notice or in an unfair or bad-faith manner, the covenant clearly states it applies regardless of how the dismissal is handled.
Shorter restrictions: In the past, longer time periods, such as three to five years, were put into restrictive covenants. Courts often take a dim view of long restrictions, so employers are going to a shorter period — often 12 months — and narrowing the geographic scope of the restrictions. As well, since so much work can now be done over the Internet, the geographic restriction can be problematic.
Notice of resignation: Some contracts are requiring employees to give a specified amount of notice during resignation, and that during the notice period the employee can’t engage in competitive activities. An employer has to be reasonable about the amount of time — it likely won’t be able to require two years’ notice of resignation, but three months might be enforceable.
As more organizations realize this, many are taking action to minimize the damage caused by a departing employee. One way to do this is through the use of a restrictive covenant in an employment contract.
In the context of employment law, restrictive covenants come in the form of non-competition and non-solicitation clauses. The former prevents a departing employee from competing with the employer and the latter prevents the employee from stealing customers.
Colin Gibson, a partner with the Vancouver law firm Harris and Company, said employers need to be careful when deciding which employees should be subject to restrictive covenants. Non-solicitation clauses are typically easier to enforce than non-competition clauses.
Non-competition clauses should be rare
Non-competition clauses should get the most scrutiny from employers, because courts are reluctant to enforce them. That’s because such clauses restrict an employee’s ability to find another job and earn a living.
“There is an overall reluctance to enforce them because they’re seen to be restraint of trade,” said Gibson. “(Courts are) always going to hold an employer’s feet to the fire, so you better show that you have a valid proprietary interest you need to protect and that you draft it narrowly so that you protect only that interest.”
A non-competition clause typically states an employee can’t engage in a similar business for a period of time within a certain geographic area. The most common mistake in drafting such a clause is making both the time and geographic area too broad.
Clauses that are too broad will be subjected to the “blue pencil” approach in court, said Gibson.
“If you’ve drafted your non-compete clause overly broad in terms of geographic area or time, the court won’t rewrite it for you,” he said. “They’ll simply strike it out.”
He said many employers hold the misguided opinion that every contract should have a non-compete clause.
“A lot of employers seem to think that they have the right to put a non-competition provision in the agreement, and some have it in all their agreements across the board,” said Gibson. “So we have to explain, ‘No, you’re going to have to justify that for every employee you’re seeking to apply it to.’”
A clause prohibiting an employee from contacting the employer’s clients for a set period of time after leaving the company is often viewed as a better, less restrictive option by the courts, said Gibson. In many cases, a non-solicitation clause will protect an employer’s interests adequately.
Restrictive covenants gaining in popularity
Restrictive covenants are becoming more popular because employers are realizing the obligation the common law imposes on employees is not sufficient to protect the employer’s interests, said Gibson.
He said employers that rely on things like good-faith duties of an employee or the additional duties of a fiduciary employee are often dissatisfied with the results from the court.
“If you’ve got a well-drafted contract, you can get rid of common law ambiguities,” he said.
Put clause in at time of hiring
Gibson said he understands there is a bit of a “honeymoon” mentality when an employment relationship starts, but dismisses the notion that a restrictive covenant would start the employment relationship off on the wrong foot.
“The counter argument is that’s the easiest time to get the employee to agree to those restrictions,” he said. “The employee is excited about the job opportunity, wants to come on board and is much more amenable to agreeing to what is going to happen when they leave than they would be five years later when you’ve fired them without cause.”
What’s new in restrictive covenants
Colin Gibson, a partner with the Vancouver law firm Harris and Company, said he’s seen a number of new developments recently in how employers are using restrictive covenants.
Dismissal without cause: Contracts are starting to use language that indicates the covenants are going to apply regardless of the manner of dismissal. So even if the employee is dismissed without notice or in an unfair or bad-faith manner, the covenant clearly states it applies regardless of how the dismissal is handled.
Shorter restrictions: In the past, longer time periods, such as three to five years, were put into restrictive covenants. Courts often take a dim view of long restrictions, so employers are going to a shorter period — often 12 months — and narrowing the geographic scope of the restrictions. As well, since so much work can now be done over the Internet, the geographic restriction can be problematic.
Notice of resignation: Some contracts are requiring employees to give a specified amount of notice during resignation, and that during the notice period the employee can’t engage in competitive activities. An employer has to be reasonable about the amount of time — it likely won’t be able to require two years’ notice of resignation, but three months might be enforceable.
