When a Non-Solicitation Clause is Actually a Non-Competition Clause

Employers often place a restrictive covenant, such as a non-competition or a non-solicitation clause, into their employment contracts in an attempt to protect their business interests from competition from departing employees. The challenge for employers is that a basic employment law concept is that a restrictive covenant in an employment contract will be presumed by a court to be void and will only be enforced if the covenant is reasonably limited to protect the employer’s legitimate business interests.

The difference between a non-competition clause and a non-solicitation clause is that a non-competition clause will restrict a former employee from any form of competition whereas a non-solicitation clause will only restrict the former employee from actively contacting clients (normally just specific clients) in search of business opportunities that are competitive with that of the former employee.

In Ontario a court will only enforce a non-competition clause in exceptional circumstances. This is because in the vast majority of cases the court will find that a more limited non-solicitation would have sufficient to protect the employer’s legitimate business interests.

In practice it is not unusual for a restrictive covenant in an employment contract to be titled “non-solicitation” even though the language in the clause prohibits competition generally and is therefore actually a non-competition clause.

The Ontario Court of Appeal recently considered this type of clause in Donaldson Travel Inc. v. Murphy, 2016 ONCA 649. The impugned “non-solicitation” clause provided as follows:

[The employee] agrees that in the event of termination or resignation that she will not solicit or accept business from any corporate accounts or customers that are serviced by [the employer], directly, or indirectly

The Court of Appeal agreed with the motion judge that the phrase “or accept business” restricts competition and is not merely a non-solicitation clause. The Court wrote:

The motion judge’s interpretation was available based on the plain wording of the clause. The fact that the appellant abandoned previous employment contracts containing more restrictive non-competition clauses and that its policy manual required only that employees sign a non-solicitation agreement does not change this conclusion. We see no basis on which to interfere with the motion judge’s finding. Further, given that the restrictive covenant is a non-competition clause (as opposed to a non-solicitation clause) and also because it contains no temporal limitation, there is no basis on which to interfere with the motion judge’s conclusion that the clause is unreasonable and therefore unenforceable: J.G. Collins Insurance Agencies Ltd. v. Elsley, 1978 CanLII 7 (SCC), [1978] 2 S.C.R. 916, at para. 19; H.L. Staebler Co. v. Allan, 2008 ONCA 576 (CanLII), 92 O.R. (3d) 107, at para. 36. The appellant’s arguments concerning severance of the phrase “or accept business” have no merit: Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6 (CanLII), [2009] 1 S.C.R. 157 at para. 36. Finally, and in any event, we note that the record before the motion judge failed to establish that the departed employee had solicited any of the appellant’s clients

Employers and employees should by wary of the non-competition and non-solicitation clauses in their employment contracts. A significant percentage of these clauses will not be enforced by a court. Both employees and employers should have their non-competition and non-solicitation clauses reviewed by an experienced employment lawyer before presuming that the clauses are legally enforceable.