What are the restrictions on restrictive covenants?
Courts may recognize an employer’s right to protect its interest, but there is plenty of room for interpretation when it comes to what is reasonable and fair
Oct 12, 2010
By Jeffrey R. Smith (firstname.lastname@example.org)
When an employee leaves a company for another employer, particularly a competitor, it’s understandable if the former employer is a little nervous, especially if the employee held an important position.
While seeing a competitor benefit from gaining talent at its expense can be a tough pill to swallow, the biggest concern could be the knowledge the employee takes with her. If she has access to confidential and sensitive information, it makes sense for the employer to take steps to protect it.
But how far can an employer go to protect its interests? Employers are learning that, often, it’s not as far as they think and they’d better be very specific when creating that protection.
In early 2009, the Supreme Court of Canada released what has become a well-known decision in the area of restrictive covenants in employment contracts. Morley Shafron had signed an agreement with his employer, KRG Insurance Brokers, that stipulated if he left the company, he couldn’t work in the insurance brokerage business in “the Metropolitan City of Vancouver” for three years. The British Columbia Supreme Court, and later the Supreme Court of Canada, found the restrictive covenant was too broad to be enforceable as it didn’t define a specific area. “Metropolitan Vancouver” was not an entity and could not be assumed to include nearby cities such as Richmond, B.C., where Shafron began working as an insurance salesman.
In 1998, the B.C. Supreme Court set out some rules as to what would make an enforceable restrictive covenant:
•the covenant protects a legitimate proprietary interest of the employer
•the restrictions in the covenant are reasonable in terms of duration, scope, nature of activities prohibited and overall fairness
•the terms of the restriction are clear and certain
•the restrictions are reasonable with reference to the public interest.
While it seems courts may recognize an employer’s right to protect its interest, there can be a lot of interpretation when it comes to what is reasonable and fair. In many cases, employers try to prevent employees from working for a competitor for a certain period of time, but it seems unlikely this kind of restriction would hold up to a court’s scrutiny.
The Alberta Court of Appeal recently determined three employees who left one oil equipment transportation company for another were not bound by confidentiality and non-disclosure agreements — other than normal fiduciary duty over confidential information they had access to in their jobs — because the agreements were unlimited in time and geography. It’s clear trying to prevent an employee from working specific types of jobs or using her knowledge anywhere and forever is unreasonable.
How far should employers be allowed to protect their interests? Should they be allowed to draft agreements preventing employees from working for a competitor in the same area? Or should employees have the freedom to work where they want when they want, regardless of a piece of paper they sign and the information they might have about their old employer?
Jeffrey R. Smith is the editor of Canadian Employment Law Today, a publication that looks at workplace law from a business perspective. For more information, visit www.employmentlawtoday.com.
Jeffrey R. Smith is the editor of Canadian Employment Law Today, a publication that looks at workplace law from a business perspective.