An employer can prevent former employees from using its confidential information; however, they generally cannot prevent former employees from competing. The exception would be where the employee and the employer entered into a narrow, specific, and limited written agreement that expressly prohibited such competition. These types of agreements are legally known as restrictive covenants.
To be enforceable, a restrictive covenant must be reasonable. To be reasonable, it cannot be ambiguous – what is prohibited must be clearly set out in the covenant. The Supreme Court of Canada has stated that in the employment context, a court should not read down or otherwise narrowly interpret an overly broad or ambiguous restrictive covenant (Shafron v. KPG Insurance Brokers (Western) Inc., 2009 SCC 6). One reason not to read down an employment law restrictive covenant is to promote fairness.
Employment contracts are treated differently than other types of contracts. This is because of the unique power differential seen to exist in the employment context, the importance of providing appropriate incentives to employers, and a desire to protect employees. The need to protect an employee from an unreasonable restraint of trade is grounded in the longstanding principle that an employee is free to trade on the skill and knowledge of the employee, even if this skill and knowledge is acquired during the course of employment (Maquire v. Northland Drug Co.,  S.C.R. 412).
Generally, clauses that seek to prohibit someone from competing with their former employer are difficult to enforce. Case law suggests that a number of factors will be considered when assessing whether the restrictive covenant is reasonable; for example, whether the restrictive covenant protects a legitimate proprietary interest of the employer and whether the prohibited conduct is only that which is necessary to protect that interest. Also relevant is whether the restrictive covenant is reasonable in terms of the length of time it operates and the geographical region in which it operates.
From an employer perspective, if you wish to protect yourself against future competition from your employees, it is wise to craft a narrow and specific restrictive covenant into your employment agreement. While on the surface this may appear to reduce the protection the clause affords, in the long run the protection is likely greater as the clause is far more likely to be enforced.
Different tests can apply where a former employee is using confidential information to compete. Check back for a future FAQ on this topic.