Employment Contract: Key Factors to Consider with respect to Restrictive Covenants
Section 2088 of the Civil Code of Quebec (hereinafter referred to as the “C.c.Q.”) provides for a guarantee of loyalty that continues for a reasonable period of time after the termination of the employment relationship. This duty of loyalty stipulates, among other things, that the employee must act in good faith, avoid conflicts of interest and avoid acting in ways that could cause harm to their employer. However, an employer might find this basic protection insufficient and, as a result, may want to include more restrictive covenants in their employment contracts, such as non compete and non-solicitation covenants.
Drafting restrictive covenants is a major challenge in labour law, the key being to achieve a balance between protecting the legitimate interests of the employer and the employee’s right to earn a living.
A non-compete covenant aims to prevent a former employee from working for a competitor or starting a business in the same line of work as their former employer. As for the non-solicitation covenant, its goal is to protect the employer’s employees, customers and vendors. In fact, it prevents the former employee from soliciting these people to encourage them to do business with him or her.
The non-compete covenant in an employment contract is governed by section 2089 of the C.c.Q.:
“The parties may stipulate in writing and in express terms that, even after the termination of the contract, the employee may neither compete with their employer nor participate in any capacity whatsoever in an enterprise which would compete with them.
However, the stipulation shall be limited as to time, place and type of employment, to what is necessary for the protection of the legitimate interests of the employer.
The burden of proof that the stipulation is valid is on the employer.”
Thus, the non-compete covenant must contain a limitation as to the activities covered as well as temporal and spatial limitations. In addition, the terms of the covenant must be reasonable with respect to the employer’s legitimate interests and the characteristics of the work. These restrictive covenants take on their full meaning in cases where the employee plays a key role, has close, regular relationships with customers, and has access to privileged confidential information whose disclosure to a competitor would be highly detrimental to the company.
Section 2089 of the C.c.Q. does not deal textually with non-solicitation covenants, but case law has recognized that section 2089 applies in evaluating the latter, given their similar nature. However, a non-solicitation covenant covering human capital does not have to include a geographic limitation.
Since assessing the reasonableness of restrictive covenants is a highly factual exercise involving a comprehensive analysis, it is therefore worthwhile to examine what case law has taught us in this regard.
Temporal Limitation. It is important to avoid restricting an employee’s freedom for an excessive period of time. In general, a 12-month provision is considered acceptable and a 12- to 24-month provision requires a more elaborate justification. Moreover, the courts have very often refused to enforce non-compete covenants with durations exceeding 24 months and they are unlikely to recognize a restriction longer than, or equal to, the duration of the employment contract. Case law has established criteria that guide the determination of a reasonable period of time. This should correspond to the time needed to replace the employee. Moreover, it is well-known that the higher up the employee is in the corporate structure, the longer the duration in the covenant can be.
Spatial Limitation. The geographic area stipulated must be stated in a specific way. By way of example, formulations of the type, “and in the surrounding area” have been rejected by the courts. The reasonableness of this limitation is assessed on the basis of business activity and dispersion of the client base. For example, in the knowledge industry sector, a broader restriction was accepted.
Limitation as to the Nature of the Work. It is imperative to provide an accurate description of the exact nature of the activities and type of work prohibited. In fact, the courts have refused restrictions on activities covering any type of work in a particular field or that simply described this limitation by using the word “competing”.
Conclusion
Courts interpret these covenants restrictively because of the power imbalance that characterizes the employee-employer relationship. Therefore, these covenants must be written in clear, precise terms because an ambiguous covenant will be interpreted in the employee’s favour. Also, the burden of proof of the validity of the covenant lies with the employer. Moreover, if only one criterion is missing or deemed unreasonable by the courts, the employer loses all the protection afforded by the restrictive covenant. In fact, if, for example, the courts rule that the two-year temporal limitation is excessive, the covenant will be invalidated in its entirety rather than corrected or reduced. However, it is important to specify that, when the covenant is invalidated, the employee still owes a duty of loyalty for a reasonable period of time following the severing of the employment relationship.
This note contains general legal information and should not be used as a substitute for legal advice from a lawyer who will consider your specific needs.
