Employment Agreement – Restrictive Covenants
Lately I had a lot of questions about what to do when it comes to restrictive covenants in the agreement signed with the employer. Questions about restrictions and how to deal with them always come up when employment ends or there are problems that may lead to its end and sometimes to litigation. This issue is also important when the business is being acquired/sold. Here are some basic rules.
Most common restrictions in the employment agreements are:
- Non-competition; and
- Non-Circumvention and Non-Solicitation.
It is good to know in what circumstances and which of these restrictions are reasonable and can be enforced and which are not and can be ignored.
Confidentiality covenants are the covenants forbidding a person to whom confidential information was disclosed to disclose such information to anyone else without permission. Such covenants commonly included in employment agreements. A breach of such covenant by the employee may result in termination of his or her employment, among other things. Senior executives and certain key employees may potentially also owe a fiduciary duty, which would make the duty of confidentiality more onerous.
Under the common law parties to an agreement have a general and mutual duty of confidentiality even without it being in the written agreement; that duty extends to employees who are exposed to confidential information forbidding the employee to misuse such confidential information. The following three factors must be present in order to establish misuse (breach of confidentiality):
- The information must “have the necessary quality of confidence about it”;
- The information must have been imparted in circumstances introducing an obligation of confidence; and
- There must be an unauthorized use of that information to the detriment of the party communicating it.
Despite the common law duty of confidentiality and possible fiduciary duties, employers routinely include confidentiality covenants into the employment agreements in order to establish the following:
- What constitutes confidential/proprietary information – a definition, which should not be overly broad;
- Scope of protection and permissible disclosure;
- Procedures for the handling of confidential information;
- Requirements for the return/destruction of information upon termination of employment;
- Duration of the confidentiality obligation;
- Appropriate remedy in the event that confidentiality is breached.
Non-competition covenants are used in an effort to protect employer’s interests within the business area. A non-competition covenant precludes an employee from engaging in activities that compete with the business of the employer. In order to be enforceable the covenant must be reasonable. To establish reasonableness the courts will consider:
- Whether the employer has a legitimate proprietary interest to protect;
- Whether employer is providing sufficient work to the employee (for example, a part-time or an on-call employee cannot be restricted from working elsewhere);
- Geographic territory of the restriction (the larger the territory the more likely the covenant will be unenforceable);
- Activity that is restricted (the agreement cannot restrict all activities within business area, only the specific one to the employer’s business, for example, if the employer’s business is a Beauty SPA, the covenant cannot restrict employee from carrying on a business distributing skin care products);
- Time period of the restriction (the longer the time of restriction (2 years or more) the more likely the covenant will be struck).
More often than not non-competition covenants are held unenforceable by courts as unnecessary restraint on trade. However, in a decision, Rhebergen v Creston Veterinary Clinic Ltd, 2014 BCCA 97, the court held as enforceable non-competition covenant, requiring a former employee to pay a certain amount in the event they began to compete with their former employer. Calculation of the amount was based on a formula that included certain costs, expenses of the former employer and estimation of the employer’s losses incurred as a result of competition. That restrictive covenant by demanding a payment for competing was aimed at inhibiting rather than prohibiting competition, which appears to be better liked by the court as compared to outright prohibition.
Non-Solicitation and Non-Circumvention Covenants
These covenants are used to protect the ideas, efforts and opportunities of the employer. It generally provides that during the term of the employment agreement an employee shall use employer’s information only for the purposes of furthering the employer’s business, not for the employee’s personal gain, which would be a detriment to the employer. In the event of termination the employee shall make no use of such employer’s information.
These covenants permit competition, but prohibit employees to compete with their employer by soliciting business from or through the employer’s customers, suppliers, or other employees.
Draft your contracts reasonable balancing both sides’ obligations, rights and needs. At the very least include severability clause, so that if any section is found unenforceable, the rest of the agreement stays intact.