On August 30, 2016, the Ontario Court of Appeal released its decision in Donaldson Travel Inc. v. Murphy (“Donaldson”). This decision provides an important reminder to charities and not-for-profits of the care that must be taken in preparation of non-solicitation clauses and non-competition clauses in employment agreements, in order to increase the likelihood of enforceability and to ensure that these clauses are not made overly broad in restricting the actions of former employees. At issue in the appeal was whether the motion judge erred in dismissing the action, by way of summary judgment, on the basis that a restrictive covenant contained in a former employee’s employment contract was unenforceable. The motion judge held that the restrictive covenant, described in the employment contract as a non-solicitation clause, was in fact a non-competition clause.
A non-solicitation clause restricts a party to a contract (e.g. an employee or organization) from soliciting employees, customers, or other business opportunities from the another party to the contract (e.g. an employer), whereas a non-competition clause restricts an employee from entering into, accepting business from, or starting a similar business that is in direct competition with the former employer. Generally, courts have held that non-competition clauses are more difficult to enforce than non-solicitation clauses, as they can represent an undue restriction on trade and the ability of a former employee to earn a living.
The restrictive covenant at issue in Donaldson provided that,
“[The personal respondent] 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 appellant], directly, or indirectly” (Emphasis added).
The Court in Donaldson found no error in the motion judge’s finding that the clause in question was in fact a non-competition clause. Both the motion judge and the ONCA’s decisions were based primarily on the words “or accept business,” which made the clause a non-competition clause rather than a non-solicitation clause. As such, the Court agreed that as the clause contained no temporal limitation and was overly broad, there was no reason to interfere with the motion judge’s conclusion that the restrictive covenant was unreasonable, and therefore unenforceable against the former employee.
Based on Donaldson, and cases like it, it is apparent that Courts will closely scrutinize restrictive covenants and will not enforce clauses that unduly hamper a former employee’s ability to earn a living, and exceed what is reasonable to protect the employer’s legitimate interests.