How do we enforce restrictive covenants?

Many non-compete, non-solicitation and confidentiality agreements aren't enforceable

How do we enforce restrictive covenants?
Laura Williams

Q: What makes a non-compete or non-solicitation agreement for employees enforceable?

A: Restrictive covenants — non-compete, non-solicitation and confidentiality clauses — are a common feature of employment contracts. They can help protect employers from employee or client poaching by departing workers and potentially restrict individuals from using proprietary information to engage in unfair competition.

In the COVID-19 era, with the labour market balance shifting in employers’ favour, we’re likely to see more reliance on these clauses as organizations gain latitude to define the terms of employment. Yet, if challenged, most restrictive covenants will be ruled unenforceable by courts.

That’s because many organizations make avoidable mistakes when setting limits on post-employment activity.

Put simply, many non-compete and non-solicitation agreements are overly broad, they overreach in defining their organization’s legitimate business interests and they are unreasonable in their application relating to geography, duration and the nature of activities they prohibit. Courts are typically only willing to enforce restraints that are clearly defined and necessary given the nature and geographic scope of the employee’s duties and responsibilities, as well as their access to confidential information.

The key question to ask is whether the restrictive terms are likely to be viewed as reasonable. Restrictive covenants should only be designed to protect an employer’s business interests, not stymie competition.

Non-compete clauses are typically only upheld in specific instances as courts have deemed them not to be in the public interest because they limit an individual’s ability to work. Non-solicitation agreements, on the other hand, are more easily enforced because they are limited to the solicitation of clients and, sometimes, employees.

That said, even non-solicitation clauses must be carefully drafted. Organizations should clearly identify clients or employees covered by a solicitation ban. Disallowing a former employee from contacting potential clients with whom they’ve had no previous contact or that have never done business with the organization, for example, would likely make the non-solicitation obligation unenforceable.

Moreover, if an organization’s supposedly proprietary information, such as a client database, contains information publicly available via social media or on a website and that information is leveraged by former employees, it will be virtually impossible to prove their activities were in contravention of a non-solicitation provision. Likewise, if a non-solicitation agreement restricts former employees from dealing or accepting engagements with clients, it should be very limited and clearly defined or it will likely be recognized as a non-compete — because it is restricting the former employee from doing work — and more difficult to enforce.

The key to making these tools work is to customize the covenants to suit the organization’s specific needs and have a clear understanding of legitimate business interests. In most cases, that means limiting them to senior executives or employees with access to confidential information. Senior sales professionals who maintain direct relationships with key clients would also be candidates for post-employment restrictions. Imposing a non-compete or even a non-solicitation obligation on a low-level employee would likely not be defensible as being in an organization’s best interests. And if non-solicitation or confidentiality clauses would suffice, those may work better than non-compete covenants.

The core pillar of enforceability is reasonable application. The scope of the prohibited activity must not be overly broad or curb a former employee’s ability to earn a living. The duration of the restriction should be limited to the real risk that the employee emerges as a competitor or solicits clients. Usually periods longer than 24 months are not enforceable except in limited circumstances.

Restrictive covenants should be reviewed on a regular basis. Changes in employee duties, labour and employment legislation and case law decisions will impact the enforceability of clauses. This is a general best practice that’s worth embracing to protect your organization, whether or not you rely on restrictive covenants.

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