3 Ways To Restrain Your Staff In Their Employment Contract, But Do It Fairly And Properly…
I met with a client yesterday on structuring “Restraint Clauses” in his staff Employment Contracts. This client was a bit ambitious to structure many restraint clauses.
I shared with him on the Do’s and Don’ts of doing so.
Let me share with you here… (do bear with me for a bit of heavy sharing here)… Employers are increasingly taking former employees to Court to enforce restraint of trade clauses in a contract following a termination/resignation of employment, but where does the balance lie in protecting each parties’ interests?
Generally, restraint of trade disputes concern:
A. Use of confidential information;
B. Non-compete clauses; &
C. Poaching of employees by former employees.
The use of such clauses is premised on the possibility that upon their termination or resignation, an employee might begin working for a competitor or starting a business, & gain competitive advantage by exploiting confidential information about their former employer’s operations or trade secrets, or sensitive information such as customer/client lists, business practices, upcoming products, & marketing plans.
Simply because an employment contract contains a restraint provision, does not necessarily mean it is enforceable and it may be void.
A. Confidential information
1. Confidential information of an employer is protected.
2. When employees leave their employment for whatever reason, they should be extremely mindful that they do not retain any of their former employer’s confidential information ( such as financial information, client lists, trade secrets and intellectual property ).
3. If an employer has evidence that an employee has taken confidential information, they can commence proceedings against the employee, seeking various forms of relief including damages & costs.
4. The increasing reliance on smartphone & cloud-based technologies means that employees may have confidential information of their former employer, without even knowing.
B. Non-compete clauses
1. Some employers may require new employees to enter into non-competition agreements before beginning work, & such agreements usually take effect after the employer-employee relationship has ended.
2. Employers may require non-competition agreements for a variety of reasons, including protection of trade secrets or goodwill.
3. However, courts generally disapprove of non-competition agreements as limitations on a former employee’s right to earn a living.
4. Therefore, when made the subject of a legal dispute, non-competition agreements are closely scrutinized in the court system.
Legal Requirements for Non-Competition Agreements
a) In order to be considered valid, a non-competition agreement must:
* Be supported by consideration at the time it is signed;
* Protect a legitimate business interest of the employer; and
* Be reasonable in scope, geography, & time.
b) Non-competition agreements must generally be supported by valid consideration — the employee must receive something of value in exchange for the promise to refrain from competition.
c) If an employee signs a non-competition agreement prior to beginning employment, the employment itself will be sufficient consideration for the promise not to compete.
d) However, if an employee signs a non-competition agreement after beginning employment, the mere promise of continued employment will not be considered valid consideration for the promise.
e) In this case, the employee must receive something else of value in exchange for the promise.
f) Such additional consideration may consist of a promotion or other additional benefit that was not part of the original employment agreement.
Protection of Legitimate Business Interests
a) The goodwill developed by an employer in terms of customer relations is an asset, so an employer may use a non-competition agreement to prevent a former employee from capitalizing on that goodwill and competing with the original employer.
b) Likewise, an employer may use a non-competition agreement to protect its confidential information.
c) Generally, in order for the information to be entitled to protection, the employer must show that it took reasonable measures to keep the information secret, & that the information gives the employer a competitive advantage.
Reasonableness is a Key to the Agreement
a) In deciding whether to enforce a non-competition agreement, the court will balance the need to protect the employer’s legitimate business interests with any burden that enforcement of the agreement would place on the employee.
b) Non-competition agreements must be reasonable in duration & scope. The reasonableness of the duration of the agreement will depend on the specific facts of each case.
c) For instance, if the non-competition agreement is designed to protect confidential information, the duration should be no longer than the time for which the information has value.
d) The geographical area covered by the agreement must also be reasonable considering the circumstances.
e) This will depend greatly on the services provided by the employee, and the importance of the services to the employer’s business.
f) Generally, courts will not allow a non-competition agreement to prevent an employee from working in a geographical area where the employer does not do business.
g) If a court finds that a non-competition agreement is overbroad, it may narrow the scope & duration of the agreement & enforce it as modified, or it may refuse to enforce the agreement entirely if it finds that it was clearly intended to prevent legitimate business competition by the former employee.
h) Employers have a right to protect their relationships with their customers and their confidential information, but former employees have a right to earn a living.
I) When the employer & the employee have entered into a non-competition agreement, these interests must be balanced.
j) In summary, some things to consider in relation to restraint clauses:
* Is the geographical area is too large (in that, there is no geographical limit set)?
* Is the period of time that the restraint operates for too long?
* Are the activities that it seeks to restrain clearly defined?
* Has any specific business interest that reasonably requires the protection of the post-termination non-compete restraint been identified?
* Are the parties whom the former employee is restrained from providing services to certain?
Depending on the answer to any one of these questions there is a good chance some or all of the restraint clause will not be enforceable.
k) However, the Courts will enforce a restraint if it is to protect the legitimate business interests of the employer, as long as those interests are important enough and the restraint goes only as far as necessary.
C. Poaching employees
1. Courts see anti-poaching clauses as similar to non-compete clauses in many ways, because at the heart of it is competition.
2. Generally, Courts have said:
“…the employee has the right to work for the employer he wants to work for if that employer is willing to employ him.”
3. There are authorities in which covenants specifically restraining former employees from enticing other employees from the same employer to leave to work for the former employer were upheld.
4. It depends on the circumstances of each individual matter, but this seems to be an exception for such covenants to be allowed.
5. In summary, a covenant against poaching employees of a former employer is not necessarily invalid if the employer is able to demonstrate a legitimate interest against this particular form of competition, but the restraint will be invalid if it goes wider than is necessary to protect such an interest.
Hope above helps and clarifies.
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