Employers and the Employee with 'special Customer Relationships'

In every business there are employees who have special relationships with customers. Some businesses, like investment or insurance brokers, have a higher proportion of those people. These are individuals in whom the employer invests money to build a business around and who have personal relationships with a customer. The loyalty is between the employee and the customer. There is a serious risk that if the employee leaves the business that the customer will follow.

With these employees businesses use some form of a restrictive covenant that limits the employee's activities after termination of the business relationship. In order to be effective these covenants should be included in the employee's initial employment contract. This allows the courts to conclude that the employee received whatever level of compensation was included in the contract in contemplation of the post-employment restriction.

The restriction usually takes one of two forms: 1) a no solicitation clause; or, 2) a non-competition clause. The no solicitation clause is the less restrictive of the two provisions and usually prevents the employee, and possibly any business which might hire the employee, from doing business with current customers for a particular period or time. The rationale for this is that the employee should not be able to use the relationships that he developed while working for employer A for the benefit of his subsequent employer B. Usually there will be some sort of time limit on this clause but there are no solicitation clauses that run without end.

However, this does not stop a customer from following the employee to employer B. It only prevents the employee from soliciting the customer. No solicitation clauses are typically more effective in larger communities and cities where the original business relationship was likely based to a degree on convenience. In smaller communities it is very likely that not only will every customer know that the employee has relocated to employer B but it will also be just as convenient to do business at employer B.

In these circumstances it is sometimes appropriate to use the more restrictive non-compete clause. Non-competition clauses should have both time and geographic limits. They should also carefully specify the actual business that the employee is prevented from competing in. Any ambiguity in a non-competition clause is going to be resolved against the interests of the employer.

The non-competition clause must also be reasonable in all of the circumstances of the business and employment relationship. For example, suppose that the employee in question had a specialty in providing commercial insurance for heavy equipment dealers. A non-competition clause that spanned a jurisdiction the size of New York or Ontario may well be found to be invalid because it was just too broad. However, a non-competition clause that applied to a specific market (the market in which the employee did business on behalf of the employer) within a jurisdiction may well be enforced.

There are two important points that must be remembered about these clauses: 1) courts, unlike with some contractual clauses, generally will not engage in creative interpretation of these clauses. Generally they are enforceable or not and a clause that is too broad will likely just be disregarded; and, 2) these clauses will be used when determining what the parties would consider to be reasonable notice. An employer who severely limits an employee's ability to gain reasonably similar employment is probably increasing his exposure to an elevated wrongful dismissal award if the employment relationship is terminated.

The law with respect to restrictive covenants and non-competition clauses in employment contracts varies greatly between jurisdictions. The wrong choice with respect to one of these clauses can lead to the clause not working or cost an employer a great deal in a wrongful dismissal action. It is important, as with all contracts, to get it right when you sign and to speak to qualified legal counsel.