Protecting Business Interests with Enforceable Employment Contracts

May 15, 2023

The March 2023 Prince Edward Island Labour Force Survey indicated a new all-time high for employment on PEI. Consequently, the unemployment rate continues to decrease. In fact, as of March 2023, PEI’s unemployment rate was 6.6 percent, down two percentage points from the previous year. When unemployment rates are low, competition amongst employers is high, and so too will be employees’ opportunities to leave one employer to take up employment with a competitor. Employers should thus consider strategies for both retention and recruitment and in doing so, they are advised to consider optional clauses with respect to the employment contracts they put in place in order to protect their business interests.

Non-Competition Clauses

One clause employers should consider when drafting their employment contracts are non-competition clauses. With the current unemployment rate, the pressure to retain employees is high, and non-competition clauses can be a deterrent for employees to leave. That said, they can also be a deterrent in recruitment, if an employee refuses to agree to a non-competition clause and does not accept an offer of employment as a result.

If an employer is considering a non-competition clause, here are some things to consider:

Non-competition clauses are considered “restrictive covenants” which are presumed unreasonable. The burden of proving that a non-compete clause is reasonable is on the party trying to enforce it. To meet this burden, the non-competition clause must be both reasonable and unambiguous with respect to:

  1. the geographic scope of the restriction;
  2. the time in which the non-compete is effective; and,
  3. the scope of activity restricted.

See KRG Insurance Brokers (Western) Inc. v Shafron, 2009 SCC 6 at paragraphs 26 and 27.

For example, according to Justice Baird of the British Columbia Supreme Court, the geographic scope of the restriction in the following non-competition clause was both ambiguous and unreasonable in that it lacked clarity and was overly broad:

The clinician will not engage in or collect any other private practice income outside of Campbell & Fairweather Psychology Group. If the clinician chooses to leave Campbell & Fairweather Psychology Group, the clinician shall not own, manage, operate, consult, be employed by or otherwise conduct clinical work in a business in the mid-Vancouver Island region, specifically from the northern-most boundary of the City of Duncan to the southern-most boundary of the City of Campbell River, and eastward to and including the City of Port Alberni, west to the Strait of Juan de Fuca, substantially similar to or competitive with Campbell & Fairweather Psychology Group for a period of 24 months.

See Campbell & Fairweather Psychology Group, 2018 BCSC 1916 at paragraphs 10 and 11.

Similarly, a provision that is overly broad and unclear with respect to time and scope will also be unenforceable. What is reasonable will vary depending on the specific facts of the case. This may include whether the employee is a high-level executive, whether the employer is in a large centre versus a rural area, etc. In making this determination, the court will look at the employer’s legitimate business interest and consider whether a less restrictive sanction would be more appropriate.

As an example, a court may uphold a one-year non-competition clause imposed upon a CEO as an employee in this position is privy to extensive and sensitive employer information and has a unique relationship with clients and vendors. Here it may be within the employer’s legitimate business interest to provide time for a new CEO to establish relationships with clients and vendors and reduce the impact of losing this senior level employee.

Non-Solicitation Clauses

In the case of a sales employee; however, a non-solicitation clause which, has been considered less restrictive (Campbell & Fairweather Psychology Group, Supra, at paragraph 10), may be more in line with the employer’s legitimate business interest. While the employer may not be able to prevent their employees from competing, they can at least take measures to protect against their customers being lured away by a departing employee.

Key Take-Aways for Employers

  • The burden of proving that a non-compete clause is reasonable is on the party trying to enforce it.
  • It is important to carefully draft non-compete clauses. This is especially so given that even where an employment contract includes a severability clause, one unenforceable clause may render the entire agreement unenforceable
  • If a less restrictive clause, such as a non-solicitation clause, would be more appropriate in the circumstances, it may be wise to include that clause instead.

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Cox & Palmer publications are intended to provide information of a general nature only and not legal advice. The information presented is current to the date of publication and may be subject to change following the publication date.