Restrictive covenants in employment.

• Author: Bowal, Peter
• Position: Employment Law

"The public have an interest in every person's carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing mort; are contrary to public policy, and therefore void. That is the general rule."

Nordenfelt v. Maxim Nordenfelt, [1894] A.C. 535 (H.L.) at p. 565

Introduction

Most employment rights and obligations apply during the period of employment, but a few survive the end of employment. Employees who are considering quitting or who might be dismissed should be aware of any post-employment obligations binding upon them.

Many people work for years in the same career or industry. If they leave, they might take too much of their training and inside knowledge and experience of the current employer's business straight into a competitor's workplace. Or they may unfairly set up their own business and compete nearby with the former employer. If an employee wants to quit and start a competing business or merely work for a competitor, it does not seem right that he or she should be able to collect papers, customer lists, secret formulas, business processes, and contact customers to encourage them to move to the new business. This is tempting and easy to do especially if quietly carried out over months prior to departure. It could unfairly and seriously injure the current employer's competitive position. The written employment contract for certain key workers, therefore, may contain a restrictive covenant, also referred to as a non-competition agreement, in which the employee has agreed not to work in the same industry within a specified territory for a period of time after leaving. Entirely for the benefit of the employer who has trusted and invested in that employee, it seeks to prevent unfair competition by former employees.

Balancing Employer and Employee Interests

The law recognizes that while there is a valuable public policy in the free movement of labour and a competitive marketplace, there is also a private ownership interest of the current employer that deserves legal protection as a result of the trust employers place in employees. The law seeks to strike a balance between these public and private interests. A restrictive covenant offends public policy as a restraint of trade and therefore will be prima facie void from the beginning unless a court concludes that it is reasonable as between the parties.

Legal Tests for...