How Non-competition, Non-solicitation, and Non-circumvention Clauses Protect Your Business Interests
During a market contraction like we’re seeing today, there’s usually a big shake-up with our small and medium enterprise clients. When there’s change, there’s opportunity, and many people who were recently laid off or otherwise lack job security are looking to benefit by starting their own businesses.
The increase in new corporations is positive, but it’s important for new entrepreneurs and business owners to understand how their contractual obligations can extend past their last day at work.
Employers who are restructuring their teams should protect their business interests by understanding the legal obligations of their employees and contractors.
In this post we discuss how the non-competition, non-solicitation and non-circumvention clauses embedded into most employment and contractor agreements reach beyond the termination of the agreement. All 3 clauses aim to restrict employee, contractor, or shareholder actions relating to competition and serve as a mechanism to safeguard the employer’s business interests.
Starting with a high-level overview of each provision, we’ll discuss the business implications of each provision, then cover which elements are required to enforce them in court.
The Non-competition Clause
A non-compete clause allows businesses to limit an employee or contractor’s ability to directly or indirectly compete against them. It also prevents contractors from joining a competing company during the period of employment, or for a period of time after the cessation of an employment contract or contractor agreement.
The prevention of competition occurs in a variety of ways:
- The contractor may not engage or have a financial interest in a competing business in any capacity, such as director, shareholder, officer, or employee.
- The contractor may not lend money or provide financial assistance to a competing business. This also includes the guarantee of debts or obligations.
- The contractor in question may not permit its name in a competing business.
The Non-solicitation Clause
A non-solicitation agreement is a mechanism businesses use to prevent contractors and former employees from soliciting their firm’s employees, existing clients, potential clients, or suppliers. These clauses last during the period of employment and usually extend past the contractor or employee agreement.
For a non-solicitation clause to be enforceable, it has to be reasonable and properly explain the terms of the clause.
The Non-circumvention Clause
Non-circumvention clauses limit the ability of a former employee or contractor to circumvent a firm’s business interests through actions like discussing or disclosing confidential information.
These clauses are often written as catch-all clauses, roping in any action that may circumvent a business’ interests. For example, making disparaging representations, disclosing trade secrets, or revealing customer lists. Non-circumvention clauses can also survive the termination of the agreement.
What Can Go Wrong Without Non-competition, Non-solicitation, and Non-circumvention Clauses
Non-competition, non-solicitation, and non-circumvention agreements prevent former contractors from doing harm to your business. This can include loss of revenue, damaged business reputation, or in the worst-case, utter devastation of your revenue base.
How Enforcement Works
It is important to note that these restrictive agreements are often viewed unfavourably by the courts. The onus is on the employer to demonstrate that a non-competition, non-solicitation, or non-circumvention agreement is reasonable and necessary to protect the employer’s proprietary interests.
In general, these clauses are enforceable when:
- The restriction has a duration (maximum of 2 years for high level executives)
- The contract specifies which activities are prohibited
- The restrictions are not excessive or overbroad
- There is a well-defined geographic scope
What makes a Non-competition, Non-solicitation, and Non-circumvention Clause Unenforceable
The enforceability of these clauses is frequently limited because the employer’s proprietary interest will always take a back seat to public policy considerations; individuals need to earn a living. Circumstances that indicate an employer was overly restrictive in their contract or failed to meet their obligations to an employee can make necessary protections for an employer unenforceable.
The courts may determine these clauses are unenforceable if:
- The restriction duration is not rationally connected to employer protections
- The geographic area is outside of the employer’s business operations
- The employee is dismissed without proper notice or pay in lieu of notice
- The restricted activities go beyond the employee’s duties or employer’s operations
A carefully built agreement serves as a mechanism to protect your business reputation and revenue streams by tactfully restricting the present and future actions of contractors.
Consult one of our lawyers to be sure your contract agreements are adequately protecting your business interests.