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Publication

TITRE

In Canada - Don't Be Vulnerable to a Departing Employee

DATE

16 octobre 2006

EXPERTISE

Droit de l'emploi et du travail

Ogilvy Renault's Employment and Labour Law practice is one of Canada's largest management-side practices. We represent a significant number of private and public sector employers and provide a wide variety of advocacy services and strategic advice. This newsletter deals with issues of importance in Canadian labour and workplace law.

Employers invest significant amounts of time and money in their employees and business relationships. Such an investment may be significantly compromised when an employee leaves to join a competitor. An employer's operations may be further compromised and become particularly vulnerable if the departing employee takes confidential information, customers or other employees.

In such circumstances, an employer is well advised to act quickly and take steps to protect its interests. An employer's response to a departing employee may depend, in part, on whether there is an employment contract in place for the departing employee and whether that contract contains enforceable restrictive covenants.

RESTRICTIVE COVENANTS IN THE EMPLOYMENT CONTRACT

Restrictive covenants are contractual provisions aimed at protecting an employer's relationships, employee expertise, and confidential information. The most relevant restrictive covenants in the employment context include the following:

(1)        non-competition agreements, which seek to prevent a departing employee from commencing employment with a competitor or starting a competing business for a specified period of time and within a designated geographic area;

(2)        non-solicitation agreements, which seek to prevent a departing employee from "soliciting" customers and/or employees for a certain period of time following the cessation of employment;

(3)        non-disclosure/confidentiality agreements, which seek to prevent a departing employee from disclosing or using trade secrets or other confidential information not otherwise in the public domain.

Courts today attempt to balance the employer's right to protect its legitimate business interests with the employee's right to work in his field as well as the public interest in access to services. Although the current state of the law is still that covenants in restraint of trade are prima facie illegal, the party seeking to uphold the covenant may rebut the presumption of illegality by establishing the reasonableness of the covenant from the perspective of the employer, the employee and the public.

The leading decision in Canada regarding the enforceability of a restrictive covenant is the Supreme Court of Canada's decision of Elsley Estate v. J. G. Collins Insurance Agencies Ltd.[1] In assessing the reasonableness of a covenant, the Court mandates that the following be considered:

(a)        the employer has a legitimate proprietary interest, which it is entitled to protect;

(b)        the restraint is reasonable between the parties in terms of duration, geographic scope, nature of the activities prohibited and overall fairness;

(c)        the restraint is reasonable in terms of the public interest.

As the case law has developed in this area, it has become evident that the wording of restrictive covenants must also be clear in order for the covenant to be enforceable.

The issue of enforceability usually arises when an employee leaves and competes with his employer, or solicits his former employer's customers or employees, in breach of a restrictive covenant. An employer would generally seek an injunction to restrain an employee from engaging in any further activity in breach of a restrictive covenant and/or sue for damages arising from the breach(es). As a defence, the employee would challenge the enforceability of the restrictive covenant. It is therefore critical for an employer to take care in drafting these covenants.

FIVE TIPS TO INCREASE THE LIKELIHOOD THAT A COVENANT WILL BE ENFORCEABLE

1.         Include Restrictive Covenants in the Employment Contract. Ensure that the contractual language is clear. Moreover, be careful not to provide for a longer duration or wider geographic scope than is necessary to protect the employer's legitimate business interests. If the covenant is unduly restrictive or overly broad in scope or duration, it will likely be held by a court to be unenforceable.
2.         Use Non-Solicitation Covenants. Courts are generally more inclined to uphold a non-solicitation covenant than a non-competition covenant because an employee will likely be able to find alternative employment even if prevented from approaching the former employer's customers and employees.

3.         Clearly define what is considered "Confidential Information". Definitions contained in employment contracts or non-disclosure agreements should be consistent with, and reinforced in, any workplace policies.

4.         Ensure that any employment contract is signed prior to the employee commencing employment in the relevant position. Otherwise, the employment contract may be void for lack of consideration. As employees are promoted, new contracts should be drafted and signed, particularly if the employer seeks to protect its business interests.

5.         Restrictive covenants and their enforceability are determined on a case-by-case basis. As such, it is important to take time to "craft" an appropriate restrictive covenant depending on the nature of the position and the surrounding circumstances. "Boilerplate" covenants may be unduly broad in scope or duration and may ultimately be held to be unenforceable. Drafting covenants as narrowly as possible will help ensure their enforceability.

A DEPARTING EMPLOYEE'S COMMON LAW OBLIGATIONS

All employees owe certain duties to their employers at common law, even in the absence of a written employment contract. The nature and extent of these duties will, however, depend on the employee's position within the employer's organization. All employees owe a "duty of fidelity" to an employer; however, the extent of that duty, by whom it is owed, and the consequences of any alleged breach of such a duty will be determined based on the particular facts of each case.

Employees also owe a duty of confidence to their employers, regardless of whether there is a contract in place that contains a restrictive covenant dealing with the protection of confidential information. However, on a practical note, without a restrictive covenant, a court is left to determine whether or not the information at issue was in fact "confidential".

CONCLUSION

The best way for an employer to protect its business relationships and proprietary information from the threat of departing employees is with a carefully drafted employment contract that contains restrictive covenants. While the common law provides employers with some protection, a contract can fill in the "gaps" and bolster an employer's protection. On a cautionary note, the contract must be well drafted in light of the courts' predisposition to favour competition and an employee's ability to work. Once an employee announces an intention to leave, a well planned and documented exit interview may help remind the departing employee of his or her obligations to the former employer.

[1]. (1978), 83 D.L.R. (3d) 1 (S.C.C.).

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault LLP or any member of the firm on the points of law discussed.

For further information, please contact one of the following lawyers: