Non-Competition and Non-Solicitation Clauses in Employment Contracts
Non-Competition and Non-Solicitation Clauses in Employment Contracts
A restrictive covenant is a term in an employment contract that may limit a former employee’s ability to obtain comparable employment. The purpose of a restrictive covenant is to prevent a former employee from using the proprietary interests of their former employer to solicit customers or clients and compete directly against their former employer. These clauses are also intended to protect the company’s information while ensuring customer loyalty to the business rather than the people associated with the business.
Learn how to properly draft an employment contract.
Two common types of restrictive covenants are non-competition and non-solicitation clauses. A non-solicitation clause prohibits a former employee from encouraging their former customers or colleagues to move with them to their new job. A non-competition clause prohibits a former employee from becoming employed in a business competing with their former employer’s business. Of note, both non-competition and non-solicitation clauses are typically in effect for a set period of time specified in the employment agreement, and often restricted to a specific geographic area.
Courts will be quick to find a non-competition clause unenforceable or void where it is grossly excessive or uncertain as to the length of time, geographic scope, and/or is not clear regarding the activities that are prohibited. The clauses are drafted by the employer and the courts look to them to justify and prove that the clauses are reasonable and not overly broad.
A non-competition and/or non-solicitation clause will often be unenforceable if the employee was wrongfully dismissed. For example, if the employer terminated the employee effective immediately without providing the employee with any notice, the employer is liable to the employee for consequences that result. Importantly, the consequence is pay in lieu of reasonable notice or severance. Should this occur, the employer cannot rely on any non-solicitation or non-competition clause against the employee.
Find out if you need a written employment contract.
Another example arises if the employee does not receive any consideration (which is the legal term for a benefit) for agreeing to a restrictive covenant; if the employee has received no benefit in the employment contract for agreeing to a non-solicitation or non-competition clause, the clause would likely be considered unenforceable. In other words, the employee must receive something in exchange for either clause.
If the non-solicitation clause and/or non-competition clause are included in the employee’s contract prior to the commencement of employment and the employee accepted the contract, including the restrictive covenants, then the consideration may be viewed as the employee receiving the job in exchange for the clauses. However, if a clause is added after the commencement of work, it is highly likely the courts will consider that clause void and unenforceable.
Such clauses have been the subject of considerable litigation. For these types of clauses to be enforceable, they must meet the following criteria:
- clearly worded;
- reasonable regarding the scope of the activities restricted;
- reasonable regarding the duration and/or time the clause is alive; and
- reasonable regarding the geographic area covered by the clause.
On the whole, the courts will consider the foregoing and the overall fairness of the clauses to the employee. A poorly worded or vague non-competition and/or non-solicitation clause will require an in-depth analysis into the same and would require the courts to conduct a detailed legal analysis.
Find out some of the most common myths about employment contracts.
Ultimately, whether you are an employee or an employer, you should have a lawyer review your employment contract with you prior to signing in order to fully understand the restrictions that are imposed following a termination of employment. An understanding of these restrictions will protect you from breaching your employment terms if you are an employee, and enforcing these types of clauses if you are an employer.
© Linley Welwood LLP. The contents of this article do not constitute legal advice. Readers should seek legal advice in relation to their own specific circumstances.
