Non-Compete Clauses: How Far Can They Go? | Baker & Company
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A non-compete clause in an employment contract can drastically impact a person’s job and career prospects after being terminated from or voluntarily leaving a job. Many employees find themselves wondering if the clause is fair, and in fact, many clauses have been successfully challenged in court. What are the current guidelines for a non-compete clause that will hold up under legal scrutiny in Ontario, and what remedies does an employee have if faced with an overly-broad clause?

What is a Non-Compete Clause?

A non-compete clause is a form of a restrictive covenant, generally built into an employment contract, which spells out restrictions on the employee with respect to future work should they eventually leave their current employer. Courts are generally reluctant to enforce such a clause unless the employer can demonstrate a legitimate need.

Successfully Establishing the Need for a Non-Compete Clause

First and foremost, an employer must establish that they have a proprietary interest that requires protection through the use of a restrictive covenant. If they cannot establish that, it is unlikely a non-compete clause will be enforced. If they are able to meet this requirement, the court will look to a number of factors to aid in their decision:

  • How long was the employee with the employer?
  • How much contact did the employee have with the employer’s clients?
  • How much confidential information was the employee privy to during their employment?
  • How vulnerable the employer is to competition and the overall available market for the employer’s product or service
  • The nature of the business with respect to customer loyalty

In consideration of the above factors, courts will also seek evidence that it is within the public interest to enforce the covenant. Many, if not most, non-compete clauses will be considered too restrictive to be enforced, given the level of scrutiny they must pass through.

A Recent Example of an Overly-Broad Clause

In a recent decision, the Superior Court of Justice found that a plaintiff employer seeking to obtain a temporary injunction against a former employee was overstepping. The injunction the plaintiff sought would have prevented the employee from soliciting and targeting the plaintiff’s customers using the knowledge, experience and relationships he gained while employed with the plaintiff.

The plaintiff company was in the business of providing handyman services to grocery stores, which the plaintiff characterized as a niche market. The defendant employee had been the Chief Operating Officer of the plaintiff company before he was terminated. The parties were at odds as to whether the termination was for cause, or whether he was wrongfully terminated, and were engaged in litigation with respect to that issue. In the interim, the plaintiff brought an application for a temporary injunction to stop the defendant from soliciting the plaintiff’s clients in accordance with a non-compete clause the defendant had signed as an employee of the plaintiff.

In the defendant’s favour, the court found that the non-compete clause was overly broad, and was also signed when the employee had been in a different role than he was at the time of termination and there were no agreements signed as the defendant was promoted. Further, the court found that there was no evidence the defendant had used proprietary information such as price lists, customer databases or other physical property to compete with the plaintiff.

Ultimately, the court found as follows:

The order sought by the Plaintiff would constrain the Defendants in pursuing their livelihoods.  In my view this means that the first branch of the injunctive test requires more than the American Cyanamid/RJR MacDonald test of “serious issue to be tried” and instead demands the Plaintiff demonstrate a strong prima facie case. Given the hurdles the Plaintiff must meet in this case, it is not evident that this test can be met.

 In any event, and more importantly, damages are an adequate remedy if the Plaintiff is ultimately successful.  The evidence does not support a finding that permanent irreparable damage will be done to the Plaintiff’s business if the order is not granted.  To the contrary, the evidence establishes that the Plaintiff has hired replacement employees and its major contract is secure for the time being.  The competition to which the Plaintiff is exposed will impact only a percentage of its potential revenues.  It cannot be seen as an existential threat.  The balance of convenience in this case favours the Defendants.

Any employer seeking to draft or enforce a non-compete clause should seek the advice of a skilled employment lawyer. As established above, clauses must be carefully drafted in order to withstand the scrutiny of a court, and may not apply in every circumstance. A good lawyer will advise on the creation and enforcement of non-compete clauses in order to mitigate damage to an employer’s business and limit their exposure to fruitless litigation.

At Baker & Company, we take the time to meet with you and understand your unique needs in order to offer solutions to the diverse problems you may encounter in the workplace. The highly skilled Toronto employment lawyers at Baker & Company can review your employment policies and ensure that you are meeting your legal obligations while addressing and mitigating risk. Protect yourself, your workplace, and your employees. We rely on our broad base of experience and expertise to provide clear, pragmatic legal advice, and representation in litigation.  Call us at 416-777-0100 or contact us online for a consultation.

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