Companies spend significant amounts of time and capital investing in their employees and business relationships. Such an investment may be greatly compromised when an employee leaves to join a competitor. A company’s operations may be further compromised, and become particularly vulnerable, if the departing employee takes confidential information or employees with them.
In these circumstances, the company is well advised to act quickly to take steps to protect its interests. A company’s response to a departing employee may depend, in part, on whether there is an employment contract in place concerning them.
Restrictive covenants in the employment contract
Restrictive covenants are contractual provisions aimed at protecting an employer’s relationships, employee expertise, and confidential information. The most relevant restrictive covenants include:
1. Non-disclosure/confidentiality covenants – seeks to prevent a departing employee from disclosing confidential information not otherwise available in the public domain.
2. Non-solicitation covenant – seeks to prevent a departing employee from “soliciting” third parties such as clients, suppliers, and/or employees for a certain period of time following their departure.
3. Non-competition covenant – seeks to prevent a departing employee from commencing employment with a competitor or starting a competing business for a specified period of time and within a designated geographic area.
Courts attempt to balance the employer’s right to protect its legitimate business interests with an individual’s right to work in their field, as well as the public interest to access to services. As the law has developed in this area, it has become evident that restrictive covenants must be clear, certain and unambiguous in order to be enforceable. It is therefore critical for an employer to take care in drafting these covenants.
Five practical suggestions to increase the chance of the covenant’s enforceability
1. Include restrictive covenants in the employment contract. Ensure the contractual language is clear and unambiguous. Be careful not to draft a longer duration or larger geographic scope than is necessary to protect your legitimate business interests. If the covenant is unduly restrictive or overly broad, a court will likely conclude it is unenforceable.
2. Use non-solicitation covenants (as opposed to non-competition covenants). Courts are generally more inclined to uphold a non-solicitation covenant than a non-competition covenant because the individual will likely be able to find alternative employment, even if prevented from approaching the former employer’s employees and/or clients.
3. Clearly define what is considered “confidential information” in the employment contract, i.e. exploration targets, expansion plans, potential acquisitions and pricing.
4. Ensure that any employment contract is signed prior to the employee commencing employment in the relevant position. Otherwise, the employment contract may be void for lack of consideration. As employees are promoted, new contracts should be executed, particularly if the employer seeks to add restrictive covenants.
5. Restrictive covenants and their enforceability are determined on a case-by-case basis. It is important to take time to craft an appropriate restrictive covenant depending on the nature of the position and the surrounding circumstances. Standardized “template covenants” may be unworkable and ultimately held to be unenforceable. Drafting covenants as narrowly as possible will help ensure their enforceability.
A departing employee’s common law obligations
All employees owe certain duties to their employers at common law, even in the absence of a written employment contract. The nature and extent of these duties will, however, depend on the employee’s position within the organization. All employees owe a “duty of fidelity” to an employer, but the extent of that duty, by whom it is owed, and the consequences of any alleged breach of such a duty will be determined based on the particular facts of each case.
All employees also owe a duty of confidenciality to their employers regardless of whether there is a contract in place which contains a restrictive covenant dealing with the protection of confidential information. On a practical note, without a restrictive covenant a court is left with determining whether or not the information at issue was in fact “confidential.”
The best way for an employer to protect its business relationships and proprietary information from the threat of departing employees is with a carefully drafted employment contract. While common law provides employers with some protection, a contract is needed to fill in the gaps and bolster an employer’s protection.
Sarah C. Crossley is a partner and practices employment and labour law in Norton Rose Canada’s Toronto office.