Non-Competition Clauses in the Course of Employment: A Consideration is a Must

August 3rd, 2016

__

[Claudia Parent](Claudia Parent ""), Lawyer

At the start-up of a business, the drafting of contracts of employment for the employees is often overlooked. Entrepreneurs tend to place less importance on drafting complete contracts of employment, preferring a simple offer of employment letter instead. When the business expands, or when merger or acquisition opportunities arise, the new employers want their key employees to sign formal employment contracts, and they especially want to protect their business by adding non-competition and non-solicitation clauses.

However, the signature of such restrictive clauses in the course of employment is subject to a rigorous exercise, under penalty of seeing such clauses invalidated by a court of law. The following is a concise reminder regarding the addition of non-competition clauses signed when an employee is already on the payroll.

Did You Know?

An employer cannot terminate an employee who refuses to sign a non-competition clause in the course of his employment. Recently, in Jean v. Omegachem inc., the Court of Appeal held that refusal to sign a non-competition clause is not just and sufficient cause for dismissal under the Labour Standards Act. In this case, no such undertaking had ever been raised at the start of the employee’s employment.

Moreover, it should be noted that a non-competition clause signed in the course of a person’s employment could be deemed invalid on the ground that it is unreasonable if it was signed without consideration. The consideration would make it possible to show that the clause was negotiated by mutual agreement, and that we are not in the presence of a contract of adhesion. For example, in Société Pole-Lite ltée v. Cormier, a non-competition clause was declared null and unenforceable because the employee was induced to sign it after more than 30 years of service, receiving no real consideration in compensation for these new undertakings. In Félix Franciscaux & Associés inc. v. Champagne, the Superior Court refused to accept the contract of adhesion argument because the employee had signed the non-competition clause in return for a significant salary increase and bigger commissions.

In the Omegachem case cited above, the issue of consideration came up when the employee offered to sign the non-competition undertaking in exchange for a consideration, namely a severance package equivalent to the length of the undertaking.

The consideration can be equivalent to a salary increase, enrolment in an incentive plan, a severance package corresponding to the duration of the undertaking, or any other working condition incentive. It is worth mentioning that the consideration needs to be significant for, in TQS inc. v. Pelletier, the Superior Court found that the salary increase was not an “interesting consideration” in that instance, since the increase was self-evident in light of the additional responsibilities, rather than representing sufficient consideration negotiated in exchange for the addition of a non-competition clause.

The issue of consideration is therefore likely to come up more frequently as a defence for the validity of the non-competition clause. In the absence of a consideration, the courts could conclude that a non-competition clause is of an adhesion nature and rule in favour of the employee because the clause is found null and void.

Practical Tips

Non-competition clauses should be signed at the start of employment. Obviously, restrictive clauses are not aimed at all employees. Rather, these clauses are designed with key employees in mind, to protect the legitimate interests of the business. To be valid, a non-competition clause must be drafted in specific and unequivocal language and must include three (3) components, i.e., the field of activity, the duration, and the territory. In employment matters, the courts tend towards a narrow interpretation of non-competition clauses. Therefore, if the undertaking arises in a commercial context, it is better to incorporate it in the commercial contracts rather than the employment contracts and, in particular, to avoid having undertakings by the same person in two different contracts.

It is also extremely important to update the contracts. For example, if an employee is bound by a fixed-term contract which is changed to an indefinite-term contract in the course of his employment, the employer must necessarily reiterate the restrictive employment clauses, otherwise the non-renewal of such clauses could be opposed against it.

If the undertaking is made in the course of employment, it is important to specify, in the preamble, the objective of protecting the legitimate interests of the business and the consideration negotiated in exchange for the undertaking.