Departing employees may be free to compete if courts deem restrictions overly broad
Many modern employment arrangements include provisions that attempt to regulate or limit the employee’s freedom to work or function in the workplace after a termination of that employment. Such clauses have come to be known generically as “restrictive covenants,” and are typically found in written employment contracts if the employer thinks the employee presents some risk of acquiring expertise or sensitive information that a rival or competitor could benefit from.
A typical clause will attempt to restrict the employee from working in a defined area, in a defined field of endeavour, and perhaps for a list of competitors or industry groups.
As with any agreement, basic contract law raises questions about enforceability, and many technical avenues of attack against restrictive covenants have proven effective over the years.
But beyond the technical questions of contractual enforceability that every contract is susceptible to, there are larger questions particular to restrictive covenants that will affect their enforceability.
Courts do not typically warmly embrace restrictive covenants applied to employees by employers after the end of the employment. There are basic rules laid down years ago in the common law that resist restraint of trade on grounds of public policy, providing that work is an essential right not to be limited unfairly. This is the tone that will typically inform the court’s initial handling of such covenants.
Any restrictive covenant contained within an employment contract will most likely be rendered unenforceable in whole or in part, depending on the wording, where the employer wrongfully dismisses the employee it seeks to restrict. The law will not generally allow the employer to benefit from it’s own unlawful conduct.
The common law provides a measure of protection to the employer in these areas. Many employees owe their employers a fiduciary duty and a basic duty of fidelity and confidence, which exists during and for a time after the end of the employment. The common law sets out the provisions in these areas, and the employer is adequately protected without need for a restrictive covenant. So if the employer already has a measure of protection under the common law, and accordingly written restrictive covenants are not always necessary, why are we seeing them in such proliferation?
Typically what happens is that employers use a standard form for every employee, restricting everyone at all levels of seniority and importance via some form of restrictive covenant. Often, such a standard form applied to every level of employee will be overly broad and unreasonable to many of those employees, depending on the circumstances. The court will not enforce overly broad or unreasonable restrictive covenants.
An example of this occurred recently in a case called Valley First Financial Services Ltd. v. Trach, a decision of the B.C. Court of Appeal.
Trach was a salesman in the group benefits insurance department of the Vernon office. Together with his two administrative assistants, he resigned from Valley First, to form a new business selling group benefits insurance to the public. Trach and his two assistants reconstructed their client lists from their memory, then contacted 90 per cent of those clients, inducing many to deal with their new business, and to cease doing business with Valley First. This caused Valley First significant loss of business.
Understandably, Valley First was upset and sought to do something about this. Trach’s employment agreement contained a restrictive covenant that restricted him from being “involved with any general insurance and financial services business within fifty (50) miles from the City of Vernon for a period of two (2) years from the date of such termination” and that he would not “solicit business from, contact or have any dealings with any of the [Valley First] clients, either directly or indirectly, in any way relating to [Valley First] or to the business of general insurance and financial services, for a period of two (2) years from the date of such termination.”
Valley First sought to enforce this wording to stop Trach from conducting his business. Also, Valley First claimed Trach was a fiduciary and was limited from competing.
The Court of Appeal found that the wording of the restrictive covenant was overly broad and unenforceable against Trach. The problem was that the wording restricted Trach from all aspects of general insurance and financial services, not just the area he practiced, and therefore was unreasonable. The Court also rejected the notion that Trach, a salesman, was a fiduciary, and affirmed that fiduciary status is usually reserved for “top management” or “key employee.”
The moral? Just because your employment agreement contains a restrictive covenant does not mean it is enforceable.