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You Compete Me; Employee Departures Complicated by Non-Compete Clauses

It is not unheard of for a business to “poach” high-ranking employees from their competitors in order to gain an edge. Hiring a competitor’s employee can provide access to useful information about distributors, clients, pricing and general business practice, which can prove key when looking to undercut the competition. In order to prevent this, many companies consider having their employees sign “non-competition agreements” which prevent them from working for a competitor following their departure. While these contracts tend to be limited in their scope and duration, they can go a long way in protecting a company’s interests, specifically in the case of high-ranking, long-term employees who leave with valuable information. What many employers fail to consider, however, is that a non-competition clause can actually end up costing them more money when they end up firing an employee.

When an employer is found liable for wrongful dismissal, the court calculates damages based on how long it is reasonably expected for the employee to find comparable employment. It’s usually in the employer’s best interest to have their former employee find work sooner rather than later because that will translate into lower damages awards. When an employee is subject to a non-competition clause, however, it interferes with their ability to find comparable employment and courts have taken notice.

Courts have repeatedly held that an employee’s duty to mitigate only imposes an obligation to secure “comparable employment.” A comparable job is one that provide similar pay and requires similar levels of skill and training. When an employee has gained a considerable amount of experience during their employment, their salary and position in that company will reflect their experience and it will generally be difficult for that employee to transition to a similar level of employment in a different industry in which they have no experience. When the employee is subject to a non-competition clause, however, they may not have a choice.

Non-competition clauses must be limited in geographic scope and duration. Typically, non-competition clauses prevent an employee from working for the direct competition. This seriously prevents an employee from mitigating their damages after a wrongful dismissal, and courts have acknowledged this in their analyses.

In Khan v Fibre Glass-Evercoat Co., [2000] CarswellOnt 1878, the Court dealt with a wrongfully dismissed employee who was subject to a non-competition clause. The plaintiff, Brian Kahn, sold his business to the defendant and was subsequently hired by the defendant. Four months later, Brian was terminated and provided with four months’ notice. When calculating the length of reasonable notice, the Court took into account Brian’s time with the company prior to its sale to the defendant and found that he was a two-year employee. The Court then awarded Brian twelve months’ notice due in part to a stringent, five year non-competition clause. The Court’s reasoning was as follows:

“I find that the plaintiff is entitled to reasonable notice as if he had continued in the employ of Advant-Edge Inc. That being so, he should be considered a two-year employee. A reasonable period, without more, in the circumstances, having regard to the factors in Bardal v Globe & Mail Ltd., [1960] O.W.N 253 (Ont. H.C.), would be four months, as given by the defendant. However, when the plaintiff was terminated, the defendant insisted that he abide by the five year non-competition agreement which would seriously impede the availability of similar employment and would make it more difficult, in fact, for him to find such employment. In these circumstances it is appropriate to extend the period of notice: see Budd v Bath Creations Inc. (September 18, 1998), Doc. Toronto 96-CU-96971 (Ont. Gen. Div). I would add five months to the period of notice on that account.”

As is clear from the reasoning above, the non-competition clause was directly responsible for an increase in notice by five months.

In Murrell v Burns International Security Services Ltd., [1994] CarswellOnt 978, the Court awarded the plaintiff eight months’ notice despite the fact that the employee had only been working for the defendant for less than three years. The Court found that the non-competition clause was a factor in determining reasonable notice. Later, the Court of Appeal affirmed the lower Court’s finding. The Court of Appeal’s comments are reproduced below:

“In fixing the length of the notice period, the trial judge took into account the existence of a non-competition clause and the abruptness of the respondent’s dismissal. We are not persuaded that the trial judge erred in considering these factors. The respondent did not commence fulltime work with a competing firm until the 12-month period under the non-competition clause had expired. The evidence amply supported the trial judge’s finding that the dismissal was abrupt and the recent judgement of the Supreme Court of Canada in Wallace v United Grain Growers Ltd. (1997), 152 D.L.R. (4th) 1 (S.C.C.) suggests that the manner of dismissal may affect the length of the notice period. More generally, though eight months notice for the respondent may be generous, considering all the circumstances, we are not persuaded that eight months is unreasonable.”

It is important to point out here that an extension of the notice period under the Wallace doctrine is no longer “good law,” following the Supreme Court of Canada’s decision in Honda v. Keays. Nevertheless, the decision above stands for the proposition that a non-competition clause may have bearing on the length of the notice period a dismissed employee may be entitled to.

Interestingly, some courts have chosen to increase notice periods for employees under non-competition agreements even when the employer has established that they would not or could not have enforced the non-competition agreement. In Ostrow v Abacus Management Corp. Mergers & Acquisitions, 2014 BCSC 938, the British Columbia Supreme Court stated the following:

“I do not agree with the defendant’s submission on this point. The analysis in Watson does not consider whether the employer enforced the non-competition clause. Rather, in Watson it was found that the non-competition clause was an important factor in assessing the length of the notice period despite the fact that the clause could not be enforced because the contract was void. It was the fact that the plaintiff was led to believe that they were bound by the clause that made it relevant.”

Conclusion

The principles and cases discussed above suggest that, sometimes, a non-competition clause may have an adverse impact by reducing a former employee’s likelihood of securing employment following termination. This is in contrast to a non-solicitation clause, which merely prevents client poaching. Often times, a well-drafted non-solicitation clause paired with a confidentiality clause can effectively serve to protect a company’s business interests without exposing them to exaggerated damages awards in the event of wrongful dismissal.

If you are an employee and your employer requests that you sign a non-competition clause, it would be prudent to negotiate a higher notice period in order to ensure you are provided with sufficient financial support while you look for alternate employment. The combination of a non-competition clause and a stringent termination clause can leave you jobless with nowhere to go. 

The above article is for general information purposes only and does not constitute legal advice. If you have concerns with regard to the foregoing issues, please make an appointment with one of our lawyers or a qualified legal practitioner elsewhere.