September 1, 2012
Non-compete, non-solicitation and confidentiality clauses in employment contracts
BY ROBERT KENNALEYEmployers who put time, effort and money into training their employees will understandably want to ensure that the knowledge and skills they pass on, at their expense, are not unreasonably used against the employer later on.
There are generally three ways an employer will look to do this in an employment contract. First, confidential information clauses can be used to ensure that information that comes into the employee’s possession, and that he or she could not obtain elsewhere, must remain confidential. Second, employers will want to ensure that their employees do not solicit work from the employer’s past, current or prospective clients. Lastly, the employer may wish to take efforts to ensure that after they leave the employer’s employ, the employees do not start up their own businesses and compete with the employer.
The employment contract can provide that the employee shall not, while employed or after, unreasonably or unnecessarily disclose confidential information, other than in the normal course of his or her duties while employed. The contract can further require the employee to acknowledge that disclosure of the information would cause damage to the employer and would be cause for termination if made while the employee was still employed.
Employers may generically describe confidential information as any information or documents that come into an employee’s possession and which otherwise would not be available to the employee. For clarity, however, the employer may wish to define the confidential information to include documents and information that are particular to their business, which might include, for example, client lists, price lists, bidding or marketing strategies, construction methodologies, OHSA and other policies and, of course, financial information.
Solicitation difficult to prove
By reason of his or her employment, an employee may develop a close working relationship with his or her employer’s past, current and potential clients. Employers may accordingly wish to include non-solicitation clauses in their contracts. “Solicitation” is generally understood to be direct communications initiated by the former employer to the clients and prospective clients. General advertising to the public at large does not generally fit within the definition. Similarly, where the former client contacts the former employee, solicitation by the former employee does not occur. It can accordingly be difficult to prove that solicitation by a former employee has occurred. Often, evidence of solicitation will have to turn to an assessment of phone records or the testimony of clients, for example.
Non-competition clauses are drafted to preclude a former employee from competing with his employer for a certain period of time following the end of employment. The non-competition, of course, is generally limited to the same type of business conducted by the employer. Also, the non-competition is generally limited to a specific geographic area where the employer had conducted its business.
The extent to which these clauses can be enforced will depend on a number of factors, including where the contract arose. First, in all of the Canadian provinces except Québec, employment contracts will be governed by employment standards legislation and by the ‘common-law’. The common-law comprises legal principles that have been established by the courts, going back to old kings in England.
In Québec, the common-law has no application, as the province is governed by a civil system under which all laws are created by statute and none have their origin in judge-made law. While we understand the Quebec civil legislation takes, for the most part, the same approach taken by the common law in relation to these clauses, we do not practice in Quebec and cannot comment further in that regard. Readers in Quebec would have to have reference to the Québec Civil Code to determine the clauses’ applicability in particular circumstances.
In the provinces outside Quebec (i.e. the common-law provinces), the provincial laws governing employment will govern, to the extent that they speak to the scope or enforceability of the clauses. In Ontario, the Employment Standards Act has no application in that regard and, accordingly, the contractual provisions will only be tempered by the judge-made, historical common-law. Although we are not aware of employment legislation that will temper the application of the clauses in the other common-law provinces, we don’t practice in those jurisdictions, and reference would have to be had to the provincial employment statutes for confirmation.
Non-solicitation provisions recommended
Where, like in Ontario, the provincial statutes don’t speak to non-solicitation and non-competition, the common-law will have an impact in that regard. First, employees will generally be under an obligation, at common law, to not solicit business from their former employer’s clients and prospective clients. In other words, there will generally be no need in a common-law province for a non-solicitation clause to be included in the contract. Rather, the employer is entitled to enforce the employee’s non-solicitation obligations, as of right. Employers should nonetheless consider including these provisions in the contract, as they will ensure that the employee is aware of the obligation and may otherwise provide additional incentive to the employee in that regard.
The situation is different, and perhaps reversed, when it comes to the enforceability of non-competition clauses in the common-law provinces. Simply put, the common-law does not like to enforce non-competition. The courts have historically been very reluctant to take away an employee’s right to make a living, after the employee moves on. Accordingly, such a provision will only be enforced (if at all) where the competition would be very detrimental to the employer and where its scope, as to geographic location and duration, is no more than it would absolutely have to be. In the end, the reality is that such provisions are commonly, if not usually, struck out as being an unreasonable restriction on employee’s ability to make a living. This does not mean, of course, that employers in the common-law provinces should not include non-competition clauses in their contracts. This is because, notwithstanding what the common-law says, such a clause might provide incentive to the employee not to compete side-by-side with the employer.
In the end, regardless of the rule of provincial legislation, it is usually a good idea to include non-competition, non-solicitation and confidential information clauses in employment contracts. However, the reality is that very few employers would choose to incur significant legal fees in an effort to enforce such provisions. Accordingly, their utility probably lies in making the employee aware of the employer’s position on the issues and hopefully deterring a former employee from using or disclosing confidential information, soliciting clients or competing directly, side-by-side, with the employer.
Robert Kennaley has a background in construction and now practices construction law in Toronto and Simcoe, Ontario. He speaks and writes regularly on construction law issues and can be reached for comment at 416-368-2522 or at kennaley@mclauchlin.ca. This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.