Restrictive Covenants: Protecting Your Business Without Overreach
You’re hiring someone with access to customer lists, trade secrets, or key relationships. You’re partnering with another company and sharing sensitive information. You’re investing in someone’s idea and want protection if they leave and compete directly.
This is where restrictive covenants come in – agreements that restrict what people can do after the relationship ends. But here’s the tricky part: Ontario courts enforce restrictive covenants only if they’re reasonable. Make them too broad, and they’re unenforceable. Make them too narrow, and they don’t protect you.
The Three Main Types of Restrictive Covenants
Type 1: Non-Disclosure Agreement (NDA) / Confidentiality Agreement
An NDA is the most basic and most enforceable restrictive covenant. It’s simple: you share information, the other party promises to keep it confidential.
What it covers:
- Customer lists
- Business strategies and plans
- Pricing and financial information
- Technical information and trade secrets
- Product roadmaps
- Any information marked “Confidential”
Duration: Usually indefinite for trade secrets, 2-5 years for other information. The advantage of NDAs is that courts will enforce them even if they’re indefinite – trade secrets are protected forever.
Permitted uses: The NDA specifies how the information can be used – usually only for the purpose of the business relationship. Using it for any other purpose is a breach.
Exceptions: Information that’s already public, information they already knew, information independently developed, information required to be disclosed by law.
Enforceability: NDAs are highly enforceable in Ontario. If someone breaches an NDA, you can sue for damages. Ontario courts take confidentiality seriously.
Example: You hire a salesperson and have them sign an NDA covering your customer list. If they leave and use that list to sell to your customers on behalf of a competitor, that’s a clear breach.
Type 2: Non-Compete Agreement
A non-compete restricts someone from working for a competitor (or starting a competing business) for a defined period and geographic area.
What it restricts: Working for or starting a business that competes with you.
Geographic scope: Usually defined by where you operate. Examples: “within 50 km of Toronto,” “in Ontario,” “in Canada,” “worldwide.”
Time period: Usually 1-3 years. Ontario courts are skeptical of anything longer than 2-3 years.
Industry scope: Define what counts as “competing.” Too vague and it’s unenforceable. Example: “Software companies that sell CRM solutions” is clearer than “any related business.”
Enforceability: Non-competes are less enforceable than NDAs. Ontario courts examine whether they’re reasonable in scope, time, and geography. They ask: “Is this restriction necessary to protect the employer’s legitimate business interests, or is it just trying to restrict the employee’s ability to earn a living?”
What makes a non-compete enforceable:
- You have a legitimate business interest to protect (customer relationships, trade secrets, etc.)
- The restriction is reasonable in geographic scope (where you actually operate)
- The restriction is reasonable in time (2-3 years is typical; 5+ years is risky)
- The restriction is limited to actual competitors (not just any business in the same industry)
- There’s consideration – they get something in return for accepting the restriction (a job, a contract, etc.)
Red flags that make a non-compete unenforceable:
- Applied to someone who leaves without cause (vs. someone you’re terminating for cause)
- Overly broad geography (“worldwide” when you operate only in Ontario)
- Overly broad duration (10 years is unreasonable)
- Overly broad industry (preventing them from working in any tech company when you only compete with specific types)
- No legitimate business interest to protect
Example: You hire a sales VP. She signs a 2-year non-compete restricting her from working for any software company selling CRM solutions in Ontario. If she leaves and starts her own CRM company, you can likely enforce the non-compete (geographic and time scope are reasonable, she was a key employee with access to your strategies).
Counter-example: You hire a data entry person and require a 5-year worldwide non-compete. If they leave and take a data entry job at a tangentially related company, a court probably won’t enforce it. The time period and geography are unreasonable for the role.
Type 3: Non-Solicitation Agreement
A non-solicitation restricts someone from recruiting your employees or soliciting your customers after they leave.
Non-solicitation of employees: After leaving, they can’t actively recruit or hire your employees. Time period: usually 1-2 years.
Non-solicitation of customers: After leaving, they can’t actively solicit or service your existing customers. Time period: usually 1-2 years, sometimes up to 3.
Why this matters: A non-solicit prevents the scenario where a salesperson leaves, takes the customer relationships with them, and converts your customers to a new business. Or a manager leaves and recruits half your team.
Important distinction: A non-solicit doesn’t prevent them from working for a competitor or accepting business from customers who approach them. It only restricts active solicitation on their part.
Example of breach: You hire a salesperson who signs a non-solicitation of customers. She leaves and sends a letter to your top 10 customers saying “I’m now at Company X and can serve you better.” That’s active solicitation – clear breach.
Example of non-breach: Same scenario, but a customer calls the salesperson first asking her to help them. If she works with them, that might not be a breach – they approached her, she didn’t solicit them. (This is grey area; courts look at the circumstances.)
Enforceability: Non-solicits are generally more enforceable than non-competes because they’re narrower – they don’t prevent someone from earning a living, just from taking your specific customers. Ontario courts typically enforce 1-2 year non-solicits.
Comparing the Three: When to Use Each
Use an NDA when:
- You’re sharing confidential information with anyone (employee, contractor, partner, investor)
- Your competitive advantage depends on secrecy (customer lists, pricing, strategies, trade secrets)
- You want indefinite protection for trade secrets
NDAs are your foundation. Always use them.
Use a non-compete when:
- You’re hiring someone in a key role with access to strategies and relationships (VP, director)
- The person is in a sales or client-facing role where they could directly compete
- You want to protect your customer base from direct competition by this person
- The role involves significant training or investment on your part
Non-competes are strong medicine – use them selectively and make sure they’re reasonable in scope.
Use a non-solicitation when:
- You want to protect customer relationships (typical for sales roles)
- You want to protect your team from being raided (typical for leadership roles)
- You want something stronger than just an NDA but less restrictive than a non-compete
Non-solicit is the middle ground – it restricts some activity without preventing them from working for competitors entirely.
The Right Combination: NDA + Non-Solicitation
In practice, most companies use:
- NDA for everyone – All employees, contractors, partners sign an NDA covering confidential information
- Non-solicitation for customer-facing and leadership roles – Sales, account managers, directors, executives sign a non-solicitation covering customers and employees for 1-2 years
- Non-compete for senior/strategic roles only – VP and above might sign a non-compete for 2-3 years in your geographic market
This balanced approach protects your business without being unreasonably restrictive to employees.
Ontario Case Law: What Courts Actually Enforce
Ontario courts have established clear tests for enforceability:
Reasonable in geographic scope: If you’re a local business, worldwide restrictions are unreasonable. If you’re international, global restrictions are fine.
Reasonable in duration: 2-3 years is normal. 5+ years is presumptively unreasonable and needs strong justification.
Reasonable in scope of activity: The restriction should apply only to actual competing activities, not to the entire industry.
Necessary to protect legitimate business interests: Protecting trade secrets, customer relationships, and business strategies is legitimate. Just trying to prevent someone from earning a living isn’t.
Not oppressive: If the restriction is so broad that it prevents the person from working in their field at all, courts might not enforce it.
Important: Ontario courts will sometimes narrow an overly broad restriction (“blue pencil” it) to make it reasonable. But don’t count on this. Better to get it right from the start.
How to Draft Restrictive Covenants That Will Actually Hold Up
Be specific about what you’re protecting: “We’re protecting our customer relationships and trade secrets related to our proprietary software.” Not: “We’re protecting our general business interests.”
Define the geographic area carefully: “Non-compete applies within Ontario and any province where the employee actively worked during their employment.” Not: “Worldwide.”
Define the time period conservatively: “Non-solicitation of customers for 18 months.” Not: “Non-compete for 5 years.”
Define the restricted activity clearly: “Non-solicitation covers direct solicitation of customers the employee worked with during the 12 months preceding termination.” Not: “Solicitation of any customer.”
Provide consideration: Make sure they get something – a job, a contract, continued benefits. Consideration makes the restriction enforceable.
Review Ontario case law: Courts have been skeptical of non-competes, especially for non-executive roles. Make sure yours passes the reasonableness test.
Common Mistakes and Red Flags
Mistake 1: Applying non-competes to everyone. Courts are more skeptical of non-competes for junior employees. Use them selectively for senior/strategic roles.
Mistake 2: Overly broad scope. If a non-compete is too restrictive, courts might void it entirely rather than narrow it. Get it right the first time.
Mistake 3: Applying restrictions without considering the employee’s position. A non-compete makes sense for a VP. For a junior employee with no client contact, a non-solicitation is more reasonable.
Mistake 4: Ignoring the industry context. In tech, 2-3 year non-competes are normal and enforceable. In other industries, courts might be more skeptical.
Mistake 5: Enforcing inconsistently. If you had non-competes but didn’t enforce them against past employees, courts might think you don’t actually care about them and won’t enforce them against current disputes.
What If Someone Violates a Restrictive Covenant?
Step 1: Send a cease and desist letter. Clearly state that they’re breaching the agreement and need to stop.
Step 2: Attempt to negotiate resolution. Sometimes a conversation resolves it without lawyers.
Step 3: If they don’t comply, consider legal action. Options include:
- Injunction: Court order forcing them to stop the prohibited activity. This is faster than a full lawsuit.
- Damages claim: Sue for the financial harm caused by the breach (lost customers, etc.). This is slower but can recover money.
Important: Suing is expensive and slow. The goal of a well-drafted restrictive covenant is to prevent the violation in the first place, not to have to enforce it later.
FAQ: Restrictive Covenants
Q: Can I enforce an NDA indefinitely?
A: For trade secrets, yes. For other confidential information, typically 2-5 years is enforceable indefinitely depending on how long the information remains confidential.
Q: If I’m fired, do I still have to follow the non-compete?
A: Generally yes. But if you were fired without cause, courts might find the non-compete unenforceable. Talk to a lawyer about your specific situation.
Q: Can I work for a competitor if I don’t solicit customers or use confidential info?
A: Depends on whether you signed a non-compete. If you only have a non-solicitation and NDA, yes, you can work for a competitor as long as you don’t solicit customers or use confidential info. If you signed a non-compete, no, you can’t work for competitors regardless.
Q: How do I prove someone violated a non-solicitation?
A: Evidence of active solicitation – emails, calls, letters to your customers mentioning they work elsewhere. Harder to prove if the customer initiated contact with them.
Q: What if I didn’t sign a restrictive covenant but my employer is claiming I did?
A: Make sure you have a copy of what you signed. If you didn’t sign it, they can’t enforce it against you. But if there was an agreement via email or it was incorporated into your employment agreement, it might be enforceable.
The Bottom Line: Protect Your Business, But Be Reasonable
Restrictive covenants are tools to protect your business – your customer relationships, your trade secrets, your team. But they only work if they’re reasonable and enforceable.
Use NDAs with everyone. Use non-solicitations for customer-facing roles. Use non-competes carefully and narrowly for senior roles. And make sure they’re drafted correctly for Ontario law.
Need help drafting restrictive covenants or reviewing employment agreements? Learn about our contract drafting services, or reach out to discuss your specific situation. I can make sure your agreements protect your business while being enforceable under Ontario law.