Non-compete clauses during employment: Advice for a prudent and diligent employer
When exercising their freedom of contract, the parties involved have a myriad of opportunities when stipulating clauses that are specific and customized to the circumstances surrounding their legal situation. However, one slight note of caution remains: all aspects that are necessarily contrary to public order may be challenged in court.
Like other standard contractual provisions, non-compete clauses are no exception to this principle. As a starting point, it should be noted that covenants restrictive of employment meet a specific need, namely to protect the legitimate interests of the co-contractor or the employer. In order to be recognized as valid, these clauses must still pass the test of reasonableness recognized by the case law and enacted by section 2089 of the Civil Code of Québec.
Thus, if at the time of the signature of an employment contract or the closing of the sale of a business, the clause stipulated in the contract is reasonable, the courts will conclude that it is applicable since it was negotiated and the other party has received a fair and equitable compensation.
However, what is the legal framework applicable to a non-compete clause that is agreed upon during the employment contract and that seems to have been imposed by the employer? On February 27, 2014, the Quebec Court of Appeal reiterated that if such a covenant is imposed on a party without the latter receiving a reasonable compensation, it will be invalidated.
All employers or even business partners must remember precisely the principles enunciated by the Court of Appeal in Jean v. Omegachem and in the decision Parquets Dubeau Ltée. v. Lambert when they seek to subject another party to a non-compete clause during employment. In both cases, the employees who had refused to sign a very restrictive non-compete clause successfully challenged the dismissal of which they were the victims following the refusal.
In both cases, it was determined that the refusal by the employee to sign a non-compete clause during employment did not constitute a good and sufficient cause for dismissal within the meaning of the Act respecting Labour Standards. Indeed, it should be noted that in both cases, at no point since the beginning of the contractual relationship had there been any discussion about the inclusion of a non-compete clause.
When concluding his decision, Mr. Justice Bouchard notes that if the employer wishes to subject his employee to such a clause at all costs, he can do it provided that he offers compensation, which entails providing him with a reasonable consideration. The consideration offered by the employer and the post-contractual obligation assumed by the employee must necessarily be proportional.
For example, the case law offers a wide range of different compensation methods that were deemed reasonable with respect to the circumstances:
• Monetary compensation specific to the commitment of non-competition 1
• Renunciation of the benefit of the term in respect of a loan 2
• Better working conditions as an incentive 3
Moreover, it would be wise for any employer or business partner to put into writing the reasons justifying the need for the non-competition commitment during employment and the interests that are being protected, as well as the compensation offered in consideration of this obligation.
Taking this into account, it is imperative for anyone concerned to ensure that the wording of the covenant restrictive of employment is of the utmost clarity as to the reasonableness of the duration, the scope of activities prohibited and the area covered, otherwise the courts will not hesitate to invalidate such a clause. By operating in this manner and by ensuring rigorous wording, the concerned party is maximising his chances of solidifying his claims and reducing the risk of any legal challenge.
This being said, it should be noted that if the employer fails to take such measures, he still has a small and tenuous protection. Indeed, the employee’s obligation to act faithfully during his employment remains for a reasonable period of time after the expiration of his employment contract with an indeterminate term. This is a kind of post-contractual obligation to act faithfully, but according to legal commentary on this subject, this obligation usually doesn’t last for more than a few months.
For the above reasons, a prudent and diligent employer would benefit from investing in the drafting of a covenant restrictive of employment, whether at the beginning of employment or during employment. Such a contractual provision would effectively enlarge the spectrum of protection he is entitled to.
With the precious collaboration of Mr. Raphael Allard, law student at École du Barreau du Québec.
1 Jean v. Omegachem inc. 2012 QCCA 232, Parquets Dubeau ltée v. Lambert 2014 QCCA 423
2 Beaulieu Électrique ltée v. Letellier, 1990 QCCA 3339
3 Kishner v. Femmes de Westmount, [2000] R.J.D.T. 1067 (C.T.)