Do your employment contracts have teeth?
Will your contracts protect your business in a time of crisis?
These are the questions that every employer should be asking themselves, especially if they have not updated their employment contracts in some time. Employment contracts are often misunderstood – the truth is that any employee who works for you has an employment contract, whether it is in writing or not.
Yet an unwritten employment contract does not provide nearly the same control over the employment relationship. It means that your terms of work are governed by the Employment Standards Act (“ESA”), save for any termination pay you may owe, which is in the hands of the courts unless it is otherwise clearly written into a contract. The costs of not having a well-written contract can mean potentially paying an employee for two years post-termination, as opposed to two months.
Yet beyond termination clauses, there are other key portions of an employment contract that should be drafted professionally to protect your business. While the law has changed on non-competition agreements, there are other clauses such as non-solicitation, confidentiality, and intellectual property clauses in your contracts which can help keep the lifeblood of your business safe.
Non-Competes
Let’s start with the elephant in the room. At the end of 2021, the Ontario Government amended the ESA to ban the use of non-competition agreements for most employees on a go forward basis. However, the ESA did not prohibit non-compete agreements that were entered into before October 25, 2021. Yet, our courts will continue to review effective non-compete agreements to ensure that the terms are reasonable, and therefore enforceable. Such considerations will include determining whether their duration (usually no more than 6 months), the geographic scope, and the activities prohibited are all reasonably necessary.
The intention of a non-competition clause was that a former employee could not leave and ostensibly set up a competing business across the street. Courts, however, as well as now the legislature, have ruled that it is an unfair restraint of trade – you cannot stop someone from earning a living within their chosen field.
There are two exceptions to the ban on non-competition clauses following October 25, 2021. The first is for executive-level employees, usually at the C-suite level, who hold top-level positions in the company. The other exception occurs within the purchase and sale of a business. If an owner is selling a business and agrees not to compete with the buyer of their business but instead becomes an employee of the buyer, then a non-compete may still be enforceable.
Non-Solicitation Clauses
While non-competition clauses may be unenforceable, non-solicitation clauses may be an employer’s best way to prevent poaching. An employer may not be able to stop a former employee from opening a competing business down the street the way that they once could, however that does not mean that they are entirely without solutions.
An employer can prevent their former employee from soliciting any employees of the business, partners of the business, vendors of the business, or, and perhaps most importantly, their customers and accounts for a competing purpose. Just because you can go into business nearby, that does not mean that you get to poach your former employer’s staff or customers – with a well drafted employment contract, such conduct would be entirely offside.
While employers hope to cast a broad net, these clauses should be written carefully to outline exactly what conduct is unacceptable. For example, if you run a century-old business, it is impractical to stop a former employee from approaching any of the business’ past clients, especially ones who are no longer active with the business or have not been for some time. Such clients may also predate the former employee’s tenure, and they may not have known of the relationship.
Further, employers need to ensure that the scope of solicitation that is being prohibited is limited to the specific type of business or customers the employee was engaged with to ensure that the restriction is reasonable and enforceable. A blanket restriction on soliciting any customers, regardless of their connection to the business, risks being struck down as overly restrictive and unrelated to legitimate business interests.
Confidentiality/Trade Secrets
Do you know the 11 herbs and spices in KFC’s secret chicken recipe, or the exact ingredients of McDonald’s secret sauce? No matter what industry you are in, you likely have confidential information such as financial forecasts, business strategies, customer lists, or other trade secrets that you would like to protect from the outside world.
A well-written confidentiality clause ensures that employees are legally obligated to safeguard proprietary data, trade secrets, client lists, financial details, and other confidential materials belonging to the employer. Additionally, it sets out clear controls for the handling and return of such information when the relationship ends. If there is concern that an employee has taken confidential information to a new employer or is improperly using it, the confidentiality provision can be relied upon by the employer to take legal action and enforce the employer’s rights. This proactive measure helps protect the company’s assets and reinforces its commitment to safeguarding valuable information.
IP Provisions
What happens when your employee has a brilliant idea while they’re on the job? They’re tinkering at their desk when they invent a new recipe, design a new application, or come up with an innovation on your existing product that could create a new line of business, and become highly profitable for the company? Who ultimately owns the rights to that work?
An IP clause within your employment contracts can stipulate that the employer owns any intellectual property that may be devised by employees while they are on company time. Some of our best innovations have been developed by employees during working hours, and employers in the technology sector will often encourage this sort of experimentation in the hopes that it may lead to new developments.
However, employers should not assume that any ideas are automatically theirs unless it is written clearly. Otherwise, they may face former employees trying to stake a claim to those ideas, and without those clauses in their contracts they may not have the necessary legal protections to formulate a strong defence.
Final Thoughts
The law on employment contracts changes frequently, and not just in terms of termination clauses. Employers should be mindful of the status of their contracts and should work with a skilled employment lawyer to update them regularly. An outdated or poorly drafted contract likely does not say what you think it does, and probably will not protect you like you hope that it will.
Our team of employment lawyers assists employers with every piece of the employment relationship. We advise employers of all sizes, across all industries, throughout the Cambridge, Kitchener, and Waterloo Regions. Contact us today to set up a consultation.