Non-competition clauses or “restrictive covenants” are rising in popularity and many companies include them in their employment contracts. These clauses are the employer’s attempt to regulate or restrict an employee’s freedom to work or function in the workplace after their employment has ended. The need for control arises from the employer’s perception that the employee may acquire information, skills or expertise that a rival company or competitor could benefit from.
Restrictive covenants may attempt to control where an employee can work and in what field over a certain time period. Some employment contracts may include clauses with detailed lists prohibiting employees from working for specific competitors and / or industry groups.
Unlawful Restrictions in Employment Contracts
As a matter of public policy, it is believed that work is a fundamental right afforded to everyone and the common law generally opposes unfair restrictions or limitations on trade. Naturally, the courts follow suit as they typically frown on non-competition clauses in employment contracts. It’s for these reasons that employers likely won’t benefit from restrictive covenants, or be able to control an employee in such a manner. The courts may decide the clause unenforceable; either in whole or in part.
While the common law supports the employee in this regard, it also offers some protection to the employer. The law states that an employee owes their employer a fiduciary and a basic duty of trust, fidelity and confidence. The employee must maintain these qualities during the length of the employment contract and for a period of time after its ended. Since such provisions are provided to the employer, restrictive covenants are not always necessary. So, why are they used in employment contracts?
Companies typically use a standard employment contract for all employees, regardless of position. So, even a junior level employee with have a contract with senior level restrictions. These restrictions may seem like “over-kill” for most employees and the terms may sound preposterous and unreasonable. The good news is that the courts likely won’t enforce overly broad or unreasonable non-competitive clauses. However, much depends on the wording used in the employment contract and potentially, the employee’s position within the company.
Employment Contract Case Study from the BC Court of Appeal: Valley First Financial Services Ltd. v. Trach
The employer, Valley First, lost a significant amount of business when its employee, Trach, resigned to start up his own company. Trach’s position as a salesman in the group benefits insurance sector of Valley First served him well in his new venture. Shortly after his resignation, two of his colleagues followed; assisting Trach in selling group insurance benefits to the general public. The three ex-employees put their heads together, recalled a significant portion of Valley First’s client list from memory and convinced many of them to do business with Trach’s new company.
Valley First took legal action claiming that Trach had violated the restrictive covenant in his employment contract. These terms prohibited Trach from being “involved with any general insurance and financial services business within fifty (50) miles from the City of Vernon for a period of two (2) years from the date of such termination.” He was also not allowed to “solicit business from, contact or have any dealings with any of the [Valley First] clients, either directly or indirectly, in any way relating to [Valley First] or to the business of general insurance and financial services, for a period two (2) years from the date of such termination.”
Valley First focused on the wording of this restrictive covenant to make their case. This failed as the Court of Appeal found the wording overly broad as it would restrict Trach from not only his own field of practice, but the general insurance and financial service sectors as well. This was unreasonable and therefore unenforceable.
Next, Valley First claimed that Trach was a fiduciary, and as such he was limited from competing against them. The court dismissed this claim also. Trach was a salesman at Valley First and only top management or key employees are usually furnished with fiduciary status.
Are restrictive covenants unlawful scare tactics employers use to control ex-employees? Should you be worried if you have one in your employment contract? While many non-competition clauses are unenforceable, every employment situation has a unique set of circumstances. For a detailed look at your situation, please contact Employment Contract Lawyer, Bob Yeager.