What is a restrictive covenant?

two women signing restrictive covenant in office

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What is a restrictive covenant, exactly? Essentially, it’s an agreement to not do something or take a certain type of action. Even if you’re unfamiliar with the term, chances are you’ve come across types of restrictive covenants before. In the workplace, they’re provisions in your employment contract that limit where (or how) you can work after your employment relationship comes to an end (also known as a non-competition agreement). Restrictive covenants also cover whether you are allowed to seek work from the contacts of your former employer—such as clients, customers or suppliers—during and after your employment relationship (also known as a non-solicitation agreement). Generally, these are the major areas, though you could consider a confidentiality agreement or a proprietary rights agreement a restrictive covenant, too. What is a restrictive covenant outside of the employment world? You may have also encountered them in real estate. For example, if your landlord includes a restriction in the lease for you not to use the premises in particular ways, that’s an example of a restrictive covenant. When I act as legal counsel for employers and employees, a major issue becomes which, if any, restrictive covenants should apply to their employment relationship.

When do you need a restrictive covenant?

Industries in which clients are essential to the business are where you often find restrictive covenants (think: non-solicitation). They are common in sales, investment advising and advertising. They are used more broadly, however, to protect existing employees from being hired away by departing employees and their new employers. Non-competition clauses are often used in industries in which employers want to protect technology or designs, especially if the employees are instrumental in creating and using them.

When is a restrictive covenant enforceable?

When it comes to enforcing restrictive covenants, how they have been drafted matters greatly. For instance, non-competition clauses are usually not enforceable unless they are very narrowly drafted. And while provisions that restrict solicitation usually are enforceable, they still must be drafted properly, too. This is because courts are reluctant to restrict an employee’s ability to find new work, especially in their field or area of expertise. The general idea is that when it comes to employment, it’s in the interest of employers, employees and society in general that people can find new work after their position ends. With that in mind, it makes sense that restricting competition is more difficult than restricting solicitation. What makes restrictive covenants likely to be enforceable is if they accurately and fairly define things like their duration, the geographical area they apply to, and include definitions of terms like “competing business.” In other words, the enforceable/unenforceable distinction is a general one, and if a term is fair and reasonable, a court may still uphold it.

What happens if a restrictive covenant is enforced?

The party benefitting from these terms—like an employer—can go to court to seek an order enforcing the terms. The usual enforcement mechanism is a cease and desist letter and, failing that or in lieu, an application to the court for an injunction. An injunction is a court order that enforces the restrictive covenant by preventing you from doing what you agreed not to do. For example, if an employer discovers that you downloaded a client list and emailed it to a competitor, and then you announce that you are immediately going to work for that competitor, they could enforce the clause in your contract prohibiting you from doing that by getting an injunction. The injunction would likely state that you and your new employer are not permitted to use that list, that you have to return it, and that you are liable for damages arising from your conduct. An injunction is an extraordinary remedy, and if the legal test is met, it can also be obtained without notice to you. The repercussions can mean loss of new employment and exposure to considerable damages to your new employer. If you sign a restrictive covenant or are asked to, you are wise to speak to a lawyer so that you understand what you can and cannot do. If you’ve breached these terms with the involvement of a new employer or another party, they could also be on the hook. Most employers are aware of this when they hire you, too. You will often see a term of an employment contract that asks you to promise that you are not bound by such restrictions, which would otherwise prevent you from working for them. Make sure you know what you are signing before you put your name on the dotted line.

If you don’t have a restrictive covenant in place, do you still have to consider your former employer?

In any case, courts are reluctant to reward behaviour that is not in keeping with the good faith that underlies an employment relationship. An employer generally isn’t allowed to benefit from a new employee’s intel about their former company—especially if it does that company harm. For instance, if a court were to hear that an employee learned of an employer’s pricing model and then used it at a new employer to steal the past employer’s clients, they would be displeased. This sort of conduct is not permissible regardless of whether there is an applicable provision in the employment contract. Employees have a general duty of fidelity to their employers, which does extend even past the end of their employment.

What should I do if my employer wants me to sign a restrictive covenant?

If your employer wants you to sign a non-compete for a certain amount of time, potentially requiring you to sit out the job market, consider ensuring that your termination clause provides you with appropriate compensation. Also keep in mind that general duties, like acting in good faith and fidelity to one’s employer, do not need to be written down; they are expectations and obligations that come along with the employment relationship. Whether you are entering into an employment agreement or considering leaving a job, it is worth reviewing these provisions with a lawyer. Anyone entering into an independent contractor or consultant agreement will also want to review these provisions closely; they may not be applicable to your relationship and can be a point of negotiation. Either way, always ensure you know what you are signing and seek a lawyer’s advice to better understand these implications for your future. Andrea Sanche is a litigator and partner with Ricketts Harris LLP in Toronto. Please note that this article does not constitute legal advice.