Non-Solicitation, Non-Competition Clauses: Rarely Enforceable
Looking to protect their interests or restrict worker freedom, employers impose these, usually in the form of non-competition and non-solicitation clauses.
To prevent the worker signee from competing with the employer’s clients, this covenant typically restricts the worker from doing business with them during employment, and for X months after the employment ends.
Now the employer can worry less about its workers learning of its clients, and taking the business for themselves.
Similar to the above, but to further mitigate the risk of losing its business to its workers: the employer further restricts workers. This clause intends to restrict the worker from even approaching the clients with the prospect of business.
Restrictive Covenants get thrown out.
Most people don’t know, but most cases don’t even make it to court. Most contracts don’t even get enforced in reality. These non-competition and non-solicitation clauses often become unenforceable, for the following reasons.
Substantive Unconscionability; Reasonableness: Broadness
Is the term too broad and unjust to even be enforced? Is it unclear and not descriptive enough? By being too broad, it is restricting free trade and a truly competitive market.
Example: Employer even wants to prevent you from making their client a sandwich when your employer is not in the sandwich business. Or, you just like sitting down and talking to them just because.
Many employers simply have a problem with workers from different companies getting together and having beers after work.
This is ridiculous so in reality it won’t be stopped. Also, without a timeline, if the employer actually expects the term to stretch indefinitely, it is too unjust.
Example 2: Employer doesn’t want you approaching the client, or its employees, about IT services or jobs for 12 months after the employment ends.
Your employer is in the IT business. This one has more of a chance to be enforceable, being more precisely defined. The employer has a sincere concern of employees taking clients with them as they leave. But, they can still do other types of business together without making the employer lose its own.
Substantive Unconscionability; Reasonableness – Length of Term
Restrictive covenants that are so long would have significant disruptive effects on the markets, inhibiting the free market. This whether directly preventing economic forces from influencing rates, or from networking. This inhibits citizens from adding value to the economy, and allows employers who otherwise are a net economic drain, to continue being so.
If the clause lasts usually less than 1-2 years, usually it is enforceable. Many lawyers recommend 18 months or less. But something like 5 years is ridiculous.
Example: Suppose the employer is cheap and underpays their workers. If anyone else who has left for greener pastures is prevented from referring other employees to do so for too long, then the employer would have less incentive to pay fair market value.
Value – the clause actually protects the business from damages that’d actually occur otherwise.
The court doesn’t issue orders just because somebody wants them. There has to be good reasons, like preventing you from otherwise damaging the business (without giving the business too much relative power).
A clause like telling you can’t simply communicate with the employer‘s clients and employees, is an example of an unenforceable term. It is also too broad.
The most common example that comes to mind is soliciting clients or employees that directly result in losses for the employer – as the solicitation actually results in competition reducing the employer‘s profits. Then the employer actually has to prove the losses or damages occurred as a result.
Undue Influence – Power Tripping
This is when one party has too much relative power over the other, reducing the other’s free will.
e.g. You’re about to lose your home and you’ve been out of work for over a year. The employer’s management are also friends with your family members. Or you don’t even understand what you’re looking at. Under these conditions, then the employer urges you to sign the agreement.
This factor is harder to use to throw out part of or all of a contract though. You really have to prove that you were being taken advantage of.
Economics of Restrictive Covenant Enforcement
Shorter, less restrictive covenants and terms are generally more enforceable. Litigation expenses make less economic sense to enforce what isn’t worth much. Even if the terms are in reality not enforceable, most parties would not bother fighting over them in court.
There was an employee (“MJ”) who my former partner used to make about $20,000/year off his labour.
There was another former employee (“CM”) who then solicited him away to work with her new employer instead. She had both non-solicition and non-competition clauses of 18 months after the end of her employment. CM intentionally did this because MJ had a family to feed and business had been slow for a long time.
At 18 months, this would attribute to an income loss of $30,000 for MJ’s former employer KM. KM would also have to prove that he really would otherwise had that $30,000 of profit…
- What if MJ would had quit anyway?
- What if the economy being down would had otherwise caused a loss of revenue associated with MJ’s labour anyway?
- What if MJ’s performance declined anyway
- What if there were indirect expenses related to administering MJ’s work and existence?
MJ also needed to eat and feed his family.
Those are factors the defendant can cite to undermine this employer’s case.
In reality, KM never legally pursued CM for “stealing” his employee – anticipating litigation and labour expenses to exceed the lost projected income.
Now if CM solicited 20 of his employees, then there is a greater likelihood that the courts impose an injunction against her (order her to stop), or award KM moneys. But:
- he’d spend tens of thousands pursuing that path, with no certain result;
- if the case gets published, then KM risks reputation damage for trying to bleed people who just want to eat.
This used to happen a lot with us in the past: employees and clients being induced for other opportunities. We had a bloated legal budget and made employment and vendor contracts typically at least a dozen pages long with formal, non-everyday language. These contained a lengthy list of restrictive covenants that were in reality rarely enforceable anyway. Starting conflicts just made us look bad and if we pursued every single contract violation, we’d had been out of business long ago.
What if the employer wants to enforce the no-solicitation clause?
They can apply for an injunction and/or sue you for damages.
An injunction is basically a court order preventing someone from doing something. This initiated by usually a court Application. Lawyers can charge $5,000+ for it, and then it has to be served. Then the respondent has a certain number of days to respond. In Alberta it’s 10.
To Adjourn the Required Service of an Application: Legal Loophole
There is a loophole/scam where litigants apply for an exception to the minimum days of service (notice) in the same Application. If you or an agent don’t show up successfully to oppose it, then the court can grant it, along with whatever the Application is mainly seeking, plus costs (a significant chunk of legal fees).
Many people in this world just pray on people who don’t stand up for themselves and/or are afraid of lawyers.
Dealing with Confidentiality, Non-Competition, and Non-Solicitation Clauses as an Alberta Oilfield Worker
I had a past employer/client and a past partner who tried to enforce a clause like this.
Employer Seeks to Restrict Information with Non-Solicitation
Employer pursued me for releasing confidential information by revealing to the public:
- who some of their clients were;
- locations across the province they performed services on.
The employer also sought to prevent me from approaching any of them.
Reducing Creditability of Witnesses with Arrears
They owed me money for unpaid work so that likely was also to discourage collecting it. In court, other ongoing disputes are commonly cited to reduce the creditability of a witness and his/her pleadings.
Contractual Terms too Broad
Confidential information was not accurately defined in our contract. Even if it was, the human right to free speech prevailed. Who their clients were and where they performed services were not facts where their confidentiality was critical to the economic viability of their business. Nor was it enforceable in reality anyway.
Injunction Sought to Restrict Communication with Employees, Vendors, or Clients
Case 2: Former partner sought an injunction (court order) to prevent me from talking about his business or communicating with its employees, vendors, and clients.
Sought Injunction: Term too Broad, too Unjust
This request to essentially, hinder my right to free speech, was far too broad to be enforceable.
He may had a chance of success if I was for example, attempting to induce the clients to purchase the same services from another business, or attempting to recruit his employees. Even then, he’d had to have proved actual losses directly attributable to my actions.