Often in our practice, we come across employment contracts that contain “non-competition” clauses. The purpose of these contractual terms is to prevent the employee from going out after the employment is terminated (and during the employment) and either setting up a competing business, or working for the employer’s competitors. The employer is concerned that the employee will use the knowledge he or she gained during the employment, to harm the employer and help its competitors.
Limits on non-competition clauses
Courts treat non-competition clauses with caution. A non-competition clause that is too broad can be a restraint of trade, preventing the employee from securing alternative employment. A non-competition clause can be too broad in three ways:
- Scope: it limits too many of the employee’s activities, e.g. “sales of any kind”;
- Geography: it limits the activities in too great an area, e.g. “all of Canada”;
- Time: it limits the activities for too long, e.g. “for two years after termination of employment”.
If the clause is found to be too broad, the Court may either amend the clause or else find that the whole thing is unenforceable. However a lot can happen before the non-competition clause finds its way into the courtroom. The clause may impact on other aspects of the termination, such as reasonable notice.
Relying on the non-competition clause
Where the employee is dismissed and believes that the non-competition clause prevents him or her from taking certain work, this can increase the reasonable notice that’s owed to the employee. In the recent BC case of Ostrow v. Abacus Management Corporation Mergers and Acquisitions, the employer issued a termination letter to the employee. The termination letter reminded the employee of the non-competition clause that he had signed at the outset of his employment. The employee was also verbally reminded of the clause.
Although it turned out that the clause itself was unenforceable, the effect of the reminder was that the employee believed that he was bound by the clause. This was good enough for the Court.
The employee was only employed for nine months, but was awarded six months of reasonable notice. In assessing the length of notice, the Court referred to the common law reasonable notice guidelines, namely the character of the employment, age of the employee, length of service, and availability of alternative employment. The Court considered the non-competition clause was relevant to the availability of alternative employment, as the employee believed he could not accept certain kinds of work that competed with the employer’s business. The Court increased the notice period on this basis.
Reasonable notice or contractual notice?
In this case, there was no termination clause in the contract that could limit reasonable notice. If there had been a valid termination clause, then the result might have been very different: the employee would have been entitled to only the contractual notice, although the non-competition clause would still have been unenforceable. There would have been no increase in the notice, as the common law considerations (including availability of similar employment) would not have been relevant to the question of notice. It would simply have been that the employee received his contractual notice, and was entitled to compete with his ex-employer as if there were no non-competition clause in the contract. From the employee’s perspective, this would have been a hollow victory in comparison to the reasonable notice that was actually awarded. From the employer’s perspective, it is likely that a valid termination clause would have prevented the whole lawsuit from going ahead.