Employers need to be particularly careful that a clause intended to protect customer relationships does not accidentally cross the line into prohibited or otherwise unenforceable non-competition territory.
Employers often include restrictive covenants in employment agreements to protect customer relationships after an employee leaves. But the wording matters. A clause intended to prevent a former employee from soliciting customers can become something much broader if it also prevents the employee from simply accepting business from those customers.
That distinction was central to the Ontario Court of Appeal’s decision in Donaldson Travel Inc. v. Murphy, 2016 ONCA 649. The case remains an important reminder that calling a provision a “non-solicitation clause” does not necessarily make it one.
What Happened in Donaldson Travel Inc. v. Murphy?
The dispute involved a travel agency and a former employee who left and began working for another travel agency. Her employment agreement contained a restrictive covenant that provided that, following termination or resignation, she would not: “solicit or accept business from any corporate accounts or customers” of her former employer.
The employer argued that the provision was simply a non-solicitation clause designed to protect its customer relationships. The former employee argued that the clause went further. The Ontario Court of Appeal agreed with the employee.
Why Did the Words “Accept Business” Matter?
The Court focused primarily on the words “or accept business.” A traditional non-solicitation clause prevents a former employee from actively approaching or pursuing the employer’s customers.
But a prohibition against accepting business captures something different. It means that even if the former employee did nothing to initiate contact, they could still be prohibited from doing business with a customer who independently approached them.
The Court upheld the lower court’s finding that this restriction went beyond non-solicitation and instead operated as a non-competition clause. That characterization was important because courts have historically scrutinized non-competition clauses much more closely than non-solicitation clauses.
The Clause Was Unenforceable
Once the provision was characterized as a non-competition clause, the Court found no basis to interfere with the conclusion that it was unreasonable and unenforceable. There was another problem as well. The clause contained no temporal limitation. It did not specify that the restriction would apply for six months, twelve months, or any other defined period after employment ended. The employer also argued that the words “or accept business” could simply be severed from the clause, leaving the remaining non-solicitation language intact.
The Court rejected that argument. The result was that the restrictive covenant was not enforceable against the former employee.
A Non-Solicitation Clause and a Non-Competition Clause Are Not the Same
The distinction remains important for Ontario employers. A non-solicitation clause generally restricts a former employee from actively pursuing customers, clients, employees or other business relationships of the former employer. A non-competition clause goes further by restricting the former employee from participating in competing business activity after employment ends.
Ontario’s Employment Standards Act, 2000 now expressly prohibits employers from entering into most non-compete agreements with employees. The prohibition has applied to agreements entered into on or after October 25, 2021, subject to limited exceptions.
Non-solicitation agreements, however, are not generally prohibited by the ESA. The Ontario government specifically recognizes the distinction and notes that the substance of the clause matters more than the label placed on it. That makes the lesson from Donaldson Travel even more relevant today.
Ontario Now Generally Prohibits Non-Competition Agreements
Since Donaldson Travel was decided in 2016, Ontario law has changed significantly. Section 67.2 of the Employment Standards Act, 2000 now provides that in most cases employers cannot enter into an employment contract or other agreement with an employee that includes a non-compete agreement. A prohibited non-compete agreement is void.
There are limited statutory exceptions, including certain agreements connected with the sale of a business and agreements involving employees who meet the ESA definition of an executive. The ESA does not similarly prohibit properly drafted non-solicitation or non-disclosure agreements.
Employers therefore need to be particularly careful that a clause intended to protect customer relationships does not accidentally cross the line into prohibited or otherwise unenforceable non-competition territory.
Employers Should Avoid “Accept Business” Language
The practical lesson from Donaldson Travel is straightforward. If the objective is to prevent a former employee from soliciting customers, the agreement should focus on solicitation. Adding language that also prevents the employee from “accepting,” “servicing,” or “doing business with” former customers may substantially broaden the restriction and void the clause.
For example, there is an important difference between saying: “The employee will not solicit customers of the employer.”
and saying:
“The employee will not solicit or accept business from customers of the employer.”
The second clause can prevent the former employee from responding even when the customer initiates the relationship. That is precisely the type of distinction that caused the clause in Donaldson Travel to be treated as a non-competition restriction rather than a non-solicitation restriction.
Employers Should Review Older Templates
Employers should not assume that a longstanding employment agreement or restrictive covenant is enforceable simply because it has been used for years.
Older templates may contain:
- “Accept business” language
- Restrictions on servicing customers
- Overly broad definitions of customers
- No time limitation
- Geographic restrictions that are unnecessary
- Language effectively preventing an employee from competing
- Provisions that pre-date Ontario’s statutory prohibition on most non-compete agreements
Restrictive covenants should be reviewed carefully in light of both the common law and the current ESA. A clause drafted to provide greater protection can sometimes produce the opposite result by becoming unenforceable.
What Employees Should Know
Employees should also carefully review restrictive covenants before assuming they prevent them from working with former clients or customers. The fact that a contract contains a restriction does not necessarily mean that restriction is legally enforceable.
The wording, scope, duration, nature of the restriction, date the agreement was entered into and the employee’s circumstances can all matter. Employees considering a move to a competitor or starting their own business should obtain advice before assuming either that a restrictive covenant must be followed or that it can safely be ignored.
The Bottom Line
Donaldson Travel Inc. v. Murphy remains a useful reminder that restrictive covenants are interpreted based on what they actually do, not simply what the employer calls them. A clause preventing solicitation is one thing.
A clause preventing a former employee from accepting business that comes to them can be something very different. For Ontario employers, careful drafting is especially important now that most new non-competition agreements are prohibited under the Employment Standards Act, 2000. If the intention is to restrict solicitation, the agreement should say exactly that and no more than is reasonably necessary.
How Minken Employment Lawyers (Est. 1990) Can Help
Minken Employment Lawyers (Est. 1990) advises employers and employees on employment agreements, restrictive covenants, non-solicitation provisions, non-competition clauses, confidentiality obligations and post-employment disputes.
Employers should periodically review their employment agreement templates with Employment Law counsel to ensure that restrictive covenants remain appropriate and enforceable under current Ontario law.
If you are an employer or an executive employee, we can help.
Contact Minken Employment Lawyers (Est. 1990) today for a confidential consultation at 905-477-7011 or contact@minken.com to connect with our team.
“Your Workplace is Our Business” ™
Sign up for our Newsletter to learn about new Employment Law legislation and Court decisions impacting your workplace.
Copyrighted. Not to be copied or reproduced without express permission of Minken Employment Lawyers (Est. 1990) ©
Please note that this article is for informational purposes only and does not constitute legal advice or opinion.
Related Topics
- Stress-Crete Limited v. Harriman: Ontario court weighs in on restrictive covenants
- The Importance of an Employment Contract Review
- When Employees Create Competing Work – Court of Appeal