Employment lawyer Nancy Shapiro offers insights on complexity of non-competes
Non-competition clauses, once a staple in employment agreements, have become increasingly fraught with legal and practical challenges, especially in jurisdictions like Ontario, where their enforceability is significantly constrained.
According to Nancy Shapiro, a partner at Koskie Minsky LLP, businesses are now turning to more innovative strategies to ensure post-employment compliance and retain their top talent.
“There’s been a movement in the business community to use non-competes not as a bar to competing per se, but as a financial deterrent,” Shapiro added, describing this emerging trend as “the new golden handcuff of long-term incentive compensation.”
These restructured incentives often involve tying compensation—such as stock options or performance-based bonuses—to continued adherence to certain post-employment conditions such as non-competition, non-solicitation or confidentiality agreements. Shapiro explained that such measures could force employees to weigh the benefits of competing against the potential forfeiture of lucrative incentives.
And, while this approach sidesteps outright bans on competition, the legal landscape remains murky.
“There are no cases that have considered whether or not this violates the amendments to the Ontario Employment Standards Act yet,” she highlighted.
When it comes to designing these incentive systems, Shapiro emphasized the importance of aligning them with organizational goals.
“It’s very important that whatever incentive an employer is offering, be it a straight bonus plan or long-term incentive plan, they actually think about what they’re trying to achieve before they design it,” she said. Shapiro outlined the different roles incentives can play, from driving performance metrics with PSUs (Performance Stock Units) to fostering retention through RSUs (Restricted Stock Units). Each approach has its own mechanics and implications, especially in balancing the immediate goals of retention against the longer-term objectives of fostering compliance with post-employment obligations.
However, the devil is in the details, particularly in how these provisions are drafted. Shapiro advised against overly broad or onerous obligations that could invite legal challenges.
“Defining what your business is in a non-compete setting and in a non-solicit setting is very important,” she explained. “Often, I see companies trying to expand definitions beyond their core business, which is not advisable.”
Courts generally expect narrowly tailored restrictions, and Shapiro highlighted the pitfalls of casting too wide a net, such as including employees who lack substantial client contact in non-solicitation clauses.
“A handshake at a party shouldn’t be the boundary for a non-solicitation,” she added.
Another contentious area is handling disputes that arise after employment ends. The stakes in these cases can be high, and Shapiro urged employers to tread carefully.
“Employers should always follow whatever their contracts say and seek legal advice if they’re uncertain,” she said. She also recommended a proactive approach, such as annual reviews of contracts and compensation plans, to ensure compliance with evolving legal standards. According to Shapiro, this strategy is particularly critical for large corporations operating across multiple jurisdictions.
In practice, avoiding conflict requires a fine balance between contractual enforcement and strategic negotiation.
“If you have vulnerabilities in your legal position, acknowledge them and be prepared to address them during a negotiation if you wish to avoid a protracted battle,” Shapiro advised.
Shapiro’s insights underscore a broader shift in how businesses approach employee retention and compliance. As traditional mechanisms like non-compete clauses lose their footing in the legal arena, companies must pivot to strategies that incentivize loyalty and adherence without crossing the lines of enforceability.
This involves not only rethinking compensation structures but also adopting a more nuanced approach to contractual drafting and post-employment enforcement.
