Non-competition & Restrictive Covenants
In the absence of a restrictive covenants, is there anything employers can rely on to restrict former employees from competing with them?
In the absence of restrictive covenants, regular or “mere” employees are entitled to compete with their former employer and even solicit their former employer’s customers, as long as the employee does not use the former employer’s confidential information to do so. Employers should ensure departing employees do not possess any hard copy or electronic documentation or information when leaving the company.
However, fiduciary employees have much stricter obligations to their former employers. Generally speaking, fiduciaries are directors or officers of a company but can also include other key employees. In most cases, a fiduciary has an obligation not to solicit customers or clients of his or her former employer for a reasonable period of time following the termination of his or her employment. Fiduciaries also have a duty not to misappropriate any maturing corporate opportunity belonging to their former employer.
All employees, fiduciary or non, have a duty of good faith and fidelity towards their employers. Employees who, during the course of their employment, take active steps which are detrimental to the interests of their employer (for example starting a competing business) might be seen as breaching this duty of good faith.
Can an employer restrict an employee from competing with them once that employee's employment is terminated?
Yes. An employer can restrict former employees from establishing competing businesses, working with a competitor or soliciting the employer’s customers by having non-competition and non-solicitation agreements with these employees or by including restrictive covenants in their employment contracts.
Employers should take particular care to ensure the restrictive covenants in their employment contracts are not so far reaching that they could be seen as an unreasonable “restraint on trade.” Where restrictive covenants are used, they must not go beyond what is necessary to protect the employer’s legitimate interests. If the court finds a restrictive covenant to be an unreasonable restraint on trade, that clause will be unenforceable and the employer will be vulnerable to competition or solicitation of customers/employees from their former employee. In determining whether a restrictive covenant is enforceable, the court will consider the geographic coverage of the covenant, the period of time in which it is effective and the extent of the activity sought to be prohibited. Attempts to interfere with a former employee’s general ability to practice their trade or profession are seen as unreasonable and contrary to public policy.
Restrictive covenants can be beneficial to employers if properly drafted. The law in this area is complex and there are strict rules regarding the enforceability of restrictive covenants. Therefore, when dealing with drafting or interpreting restrictive covenants, it is very important to get legal advice.
