Key components of a non-compete clause

On Behalf of | Jan 6, 2023 | Employment Law |

Non-compete clauses, also known as restrictive covenants, are commonly found in employment contracts in British Columbia. Non-compete clauses prevent an employee from working for a competitor, typically, for a certain number of months after leaving a workplace. These clauses are intended to prevent unfair competitive advantage involving former employees, such as using unique skills or business secrets learned at a workplace to help the prosperity of a competitor company.

There is a great deal of case law demonstrating that such clauses can be difficult to enforce. Non-compete clauses often limit an employee’s freedom to choose work and are often scrutinized by the courts. This is especially true if the clause vague or is too restrictive to the former employee. 

A non-competition clause will often be unenforceable in two key instances. Firstly, the clause will be unenforceable if the employee was wrongfully dismissed. This is because in wrongful dismissal, employers terminate employees without providing proper notice, thus breaching the implied term of reasonable notice. If an employer fails to provide an employee with reasonable notice of pay in lieu of notice, a non-competition clause will be unenforceable. Secondly, a non-competition clause will be unenforceable if an employee receives nothing in exchange for agreeing to restrict their employment opportunities. This is also known as an employee not being offered any “consideration” for a non-compete clause. If an employee signs a contract with a non-compete clause at the beginning of their employment, this is enforceable because there is consideration: receiving a job and payment for work is consideration. However, an employer may request an employee to sign a non-compete clause after starting work or upon termination without any additional benefit. This would not amount to consideration and would be unenforceable. Instead, if an employer, for instance, offers an additional bonus or continued benefits for signing a non-compete clause after they’ve started work or upon termination, the non-compete clause is more likely to be enforceable.

It is important that employers do all they can to make non-compete clauses as specific and clear as possible. This means including the following components in the noncompete clause

  • Time frame: Non-compete clauses should not be in force for a long time frame. Instead, the clause should be restricted to shorter periods, such as 6 months rather than several years. 
  • Location: Depending on the type of business, a non-compete clause could include a geographic area where operating a competitive business would be directly competitive. The more specific the area, the less restrictive the clause will be considered. 
  • Scope of work: Clauses should clearly outline what is and is not competitive work. If there are concerns about how employees might use proprietary knowledge or practices to compete with their employer in the future, it is crucial to specifically lay out those details so that it is clear what type of competition the clause is looking to prevent. The types of companies that would be direct competitors should also be listed. 
  • Damages: It is essential to lay out what consequences employees would face if they breach a non-competition clause.

Employers should also be aware of the new legislation regarding non-compete clauses passed in Ontario, effective October 25, 2021. The legislation prohibits employers from including non-compete clauses with many types of employees. An agreement, or part of an agreement, may be considered a “non-compete agreement” whether or not it is time or geographically restricted. The Ontario legislation also restricts a non-competition clause from being entered before the employment relationship begins, and after it ends. BC employers may want to consider these implications if they employ Ontario-based employees.

It is understandable why employers would be interested in putting non-compete clauses into their employment contracts. These clauses can be extremely helpful in protecting proprietary knowledge, trade secrets or other closely held details that help them to stay competitive. 

However, employers can go too far with these clauses by using them to restrict opportunities for employees unnecessarily. The court may not uphold a non-complete clause if it overly inhibits an employee’s opportunities. Employers should consider having their employee contracts, including all non-compete clauses, reviewed by an experienced British Columbia employment lawyer



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