LawFact of the Day: Employment Law

Here is your daily LawFact from Wise Law for Tuesday May 1, 2018.

Today we are talking about Employment Law.

If your employment agreement prohibits you from competing with your employer or soliciting its customers after you leave, those restrictions may not be enforceable.

Non-competition agreements are generally unenforceable against Ontario employees. Many non-solicitation agreements may also be unenforceable.  Seek legal advice if you have signed such an agreement. 

A post shared by Wise Law Office (@wiselaw) on May 1, 2018 at 6:44am PDT

For more information on Employment Law, Family Law, Wills, Estates, and Estates Litigation, visit our website at http://www.wiselaw.net.

- Garry J. Wise, Toronto

Visit our Toronto Law Office website: www.wiselaw.net

LawFact of the Day: Employment Law

Here is your daily LawFact from Wise Law for Tuesday April 4, 2017.

Today we are talking about Employment Law.

If your employment agreement prohibits you from competing with your employer or soliciting its customers after you leave, those restrictions may not be enforceable.

Non-competition agreements are generally unenforceable against Ontario employees. Many non-solicitation agreements may also be unenforceable. Seek legal advice if you have signed such an agreement.

For more information on Employment Law, Family Law, Wills, Estates, and Estates Litigation, visit our website at www.wiselaw.net

- Garry J. Wise, Toronto

Visit our Toronto Law Office website: www.wiselaw.net

Are Non-Compete and Non-Solicitation Clauses Actually Enforceable?

BY SIMRAN BAKSHI, ASSOCIATE LAWYER 

Employment agreements will often include language that is intended to restrict the actions of employees following the end of their employment. These types of clauses, typically relating to confidentiality, non-solicitation and non-competition, are aptly referred to in the employment law world as restrictive covenants.

Most commonly, many employers will seek some assurance that their once all-star employees do not solicit business away from the company. In some cases, employers may even be concerned about former employees leaving a company and going on to compete against it in the same market.

The interests of employers in protecting their businesses must of course be balanced against the rights of employees to pursue their trade of preference

Given their competing interests, it is not all that surprising that restrictive covenants are often controversial and subject to challenge before the Courts.

In determining whether such terms should be enforceable, the Court will not only give weight to the parties’ respective interests, but will also consider the context in which the restrictive covenants were agreed to. While the Court will look to give effect to the parties’ freedom to contract with one another, it will also consider the power dynamics of the parties in negotiations of terms of employment.

The legal test developed by the Supreme Court of Canada in view of these varying interests is as follows:

1. Does the employer have a proprietary interest entitled to protection? In other words, an employer must have a legitimate reason for seeking to restrict a former employee from having contact with clients, soliciting business or otherwise competing.  Common proprietary interests often include protecting trade secrets, confidential information and trade connections. As an example, it would likely be unreasonable for an employer to include a non-competition clause for its junior administrative support staff, unless of course it had legitimate reasons for doing so.

2.     Are the temporal and geographic elements of the agreement too broad? What this means in plain English is that the restrictive clause cannot be unnecessarily broad. In order to assess this, the Court will consider whether the geographic and time restrictions imposed are reasonable, having regard to a number of factors including: the nature of the industry; the type of relationship between the parties; and the position of the departing employee including the level of trust and confidence he or she enjoyed. While it may for instance be reasonable to limit a senior financial adviser from soliciting the clients that he or she worked with while at the company for a one-year period, it would in all likelihood be unreasonable to impose an indefinite restriction for a junior level bookkeeper to have contact with any of the company’s clients, past, present and future;

3.     Is the covenant unenforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employee? In other words, did the employer really need a non-compete clause to serve its interests or would a non-solicitation clause have sufficed? As a general principle, non-competition clauses are generally frowned upon in the employment context, though it may have some greater enforceability in circumstances involving the sale of business. That is, preventing an employee from competing in some form or capacity with the employer is not generally practical. However where one party sells its business to another, it would make sense to have some limitations in place to bar the seller from opening shop down the street.

The question of whether a restrictive covenant is reasonable, and accordingly enforceable, must be viewed in context of the employment circumstances overall. What is the nature of the industry? How were the terms of employment negotiated and agreed to? Did the employee bring his or her own clients to the company? Did he or she develop clientele from the Company’s contacts, and/or using its resources? Are clients likely to leave with the employee? Is he or she in a position of trust and confidence? 

Given the nuances involved, it Is highly recommended that you consult with a lawyer, whether you may be subject to a restrictive covenant or seeking to enforce such a clause.

- Simran Bakshi, Associate Lawyer Toronto

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LawFact of the Day: Employment Law

Here is your daily LawFact from Wise Law for Wednesday October 12, 2016. Today we are talking about Employment Law.

A video posted by Wise Law Office (@wiselaw) on Oct 12, 2016 at 6:48am PDT

If your employment agreement prohibits you from competing with your employer or soliciting its customers after you leave, those restrictions may not be enforceable.

Non-competition agreements are generally unenforceable against Ontario employees. Many non-solicitation agreements may also be unenforceable.  Seek legal advice if you have signed such an agreement.

- Garry J. Wise, Toronto

Visit our Toronto Law Office website: www.wiselaw.net

Ontario Employment Law: Restrictive Covenants 101

Employers often wish to protect their commercial and business interests by contractually limiting the ability of departing employees to use confidential information, compete with the employer, and solicit the employer's customers and staff in the period subsequent to employment.

The employment contracts that set out these limitations are known as restrictive covenants. We will be canvas these provisions in detail in a series of posts over the weeks ahead.

In this introduction, we will provide basic definitions and a general overview of the issues that typically arise in connection with restrictive covenants in employment agreements.

Definitions:

There are three major types of restrictive covenants that may typically be found in some Canadian employment contracts.

• Confidentiality agreements prohibit employees from disclosing the confidential information of the employer during and subsequent to employment, unless authorized. A typical confidentiality agreement will define the specific categories of information that are to be protected, require the employee's undertaking of non-disclosure of such information, and detail the specific, adverse legal consequences facing an employee who fails to maintain such confidentiality.

• Non-solicitation agreements typically prohibit a departing employee from directly or indirectly soliciting the employer's clients, prospective clients and employees for a specified time period following termination of employment.

• Non-competition agreements have a wider ambit than non-solicitation agreements - they purport to wholly restrict competition by the employee in related commercial endeavours. Such agreements typically prohibit former employees from working for direct competitors or from directly or indirectly competing with the employer's core businesses after termination. These agreements generally apply for a specified time frame, provide extended definitions of the prohibited businesses, and define the geographical regions within which such competition is prohibited.

Enforceability of Restrictive Covenants in Ontario Courts

As a general rule, for these covenants to be enforced by courts they must entirely clear, be reasonable in scope and meet fairly rigorous tests of such reasonableness.

For example, the employer must show that the restrictions set out are no more than is necessary to protect the legitimate business interest at stake. The departing employee’s freedom of contract must be not be unduly restricted and excessive restraint of trade is not permitted, particularly if no legitimate commercial interest of the employer is protected by an impugned covenant.

As a result, where these covenants overreach by having unreasonably extended scope, they are vulnerable to being unenforceable by the courts.

There are numerous recent examples of cases where the courts have declined to enforce these covenants, not least of which is the Ontario Court of Appeal's 2008 ruling in H. L. Staebler Company Limited v. Tim James Allan, et al., an important decision that reaffirms the limited enforceability of non-competition covenants in Canadian employment agreements.

As similar outcome emerged from the January, 2009 ruling of the Supreme Court of Canada in Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6 (CanLII). In Shafron, the Supreme Court of Canada overturned a ruling of the British Columbia Court of Appeal that had liberally interpreted and enforced a non-competition covenant that purported to restrict a former employee's ability to work in the Greater Vancouver area. The Supreme Court of Canada held the employer to the strict wording of the covenant, which referred to the non-existent entity of the "Metropolitan City of Vancouver," and refused to enforce the covenant.

Obtain Legal Advice Before Signing

Employees who are asked to sign such agreements are strongly advised to obtain legal advice from a qualified employment lawyer before signing any documentation. While this is, of course, true of all employment contracts, it is particularly the case with respect to the restrictive covenants discussed in this introduction.

Where enforceable, these agreements can lead to highly adverse consequences for former employees upon termination, including potentially protracted financial losses.

They may limit re-employability following a termination; in some cases, new employers have been held liable for the roles they have taken in inducing breaches of restrictive covenants. Further, it is important to note that these restrictive covenants may be enforceable, even in circumstances where an employee is terminated without cause after a short period of employment.

Thus, we'll close this introductory discussion by underlining that these agreements are serious legal documents that ought not to be taken lightly by employers or employees alike.

In future posts, we'll take a closer look at the courts' treatment of these restrictive covenants in specific employment contexts.

- Garry J. Wise and Robert Tanha, Toronto

Visit our Toronto Law Firm website: www.wiselaw.net

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Ontario Court of Appeal Sets Aside $1.9 Million Award for "Client Poaching:" Restrictive Covenant Unenforceable

In an important decision that reaffirms the limited enforceability of non-competition covenants in Canadian employment agreements, the Court of Appeal for Ontario has reversed a September, 2007 trial ruling of Mr. Justice G.E. Taylor of Ontario' Superior Court of Justice.

At trial in H. L. Staebler Company Limited v. Tim James Allan, et al., two Kitchener, Ontario insurance salespersons and their new employer were ordered to pay damages of $1.9 million to the salespersons' former brokerage, H.L. Staebler Company Limited.

Staebler commenced the action after its salespersons left to join Stevenson and Hunt Insurance Brokers Limited, a competing brokerage. The employees brought their entire books of business to their new employer when they changed brokerages.

In ruling against the employees, the trial court enforced a two-year non-solicitation covenant that precluded them from "doing business" with the clients of their former brokerage for a two year period following any termination of their employment with Staebler. The court also held that Stevenson and Hunt was liable for inducing the salespersons to breach their employment agreements with Staebler.

• For our report on the trial court's decision see: Former Employees and New Employer Ordered to pay $1.9 million for "Client Poaching" as Ontario Court Enforces Two-Year Non-Solicitation Covenants.

On appeal, Madame Justice Eileen Gillese, for the Court, reviewed the law applicable to non-competition and non-solicitation agreements in Ontario. The Court unanimously ruled that the restrictive covenants in this case were unreasonable in scope, given the non-managerial roles of the salespersons involved and the "overly broad" restraints imposed by the covenants upon the salespersons' ability to freely compete in the industry:

[33] There is no dispute about the legal principles that apply when determining whether a restrictive covenant in an employment contract is enforceable, as those principles have long been settled. Several decades ago in Elsley, the seminal Canadian case on this matter, Dickson J. described the principles as “well-established”.[2] He stated the test in plain terms: such a covenant is enforceable “only if it is reasonable between the parties and with reference to the public interest”.[3]

[34] This test reflects the competing principles that must be balanced when a court is called on to decide the validity of such a covenant. On the one hand, there is the “important public interest in discouraging restraints on trade, and maintaining free and open competition unencumbered by the fetters of restrictive covenants”.[4] Open competition benefits both society and the affected employees. Society benefits from having greater choice and employees benefit as they have greater employment opportunities. On the other hand, however, “the courts have been disinclined to restrict the right to contract, particularly when that right has been exercised by knowledgeable persons of equal bargaining power”.[5]

[35] While an overly broad restraint on an individual’s freedom to compete will generally be unenforceable, the courts must recognize and afford “reasonable protection to trade secrets, confidential information, and trade connections of the employer.”[6] In the present case, there is no suggestion that trade secrets or confidential information is involved. It is Staebler’s “trade connections” that warrant protection.

[36] Reasonableness is the mechanism by which a court decides whether a covenant is “overly broad” or is only that which is reasonably required for the employer’s protection. But how is a court to determine whether any given restrictive covenant is “reasonable”? Elsley offers a framework for making such a determination. The starting point is “an overall assessment of the clause, the agreement within which it is found, and all of the surrounding circumstances”.[7] Thereafter, three factors must be considered. First, did the employer have a proprietary interest entitled to protection? Second, are the temporal or spatial features of the covenant too broad? And, third, is the covenant unenforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employer?[8]

...[54] My view that Staebler has not discharged the burden of establishing that the Restrictive Covenant was reasonable[11] as between the parties is reinforced on a consideration of the third factor.

[55] A non-solicitation clause is sufficient in conventional employer/employee situations.[12] The Employees were two of ten commercial insurance salespeople that worked for Staebler. They did not play an exceptional role in the Staebler business – they were ordinary salespeople. They were not managers, directors or key employees. They did not stand in a fiduciary relationship with Staebler.

[56] Although the Employees had close personal relationships with their clients, that is the industry norm. Those relationships were not exclusive; other Staebler employees served the clients in various capacities. This is an important difference between the role that the Employees played at Staebler and that of Mr. Elsley who “was the business”.[13] Another significant difference between the present case and Elsley is that the Employees had no special knowledge of or influence over the Staebler business whereas Mr. Elsley “had control of [the employer’s] trade connections”.[14] Furthermore, and again in contradistinction to Elsley, there was an imbalance of bargaining power between the Employees and Staebler when the employment contracts were negotiated whereas Mr. Elsley bargained as an equal when selling his business and then carried on as its general manager.

[57] The 50 mile radius clause which Staebler had with five of its other commercial salespeople is significant. Under its terms, those employees could solicit their clients and customers and conduct business with Staebler clients so long as they did so outside of a 50 mile radius of the Waterloo region. No explanation was given to justify this differential treatment among Staebler’s commercial insurance salespeople which leads me to conclude that Staebler itself viewed the 50 mile radius clause as sufficient protection of its interest. Clearly, the terms of the Restrictive Covenant are far more restrictive than are those of the 50 mile radius clause.[15]

[58] Other provincial appellate courts have affirmed that suitably restricted non-solicitation clauses are likely to be found to be reasonable for “ordinary” salespeople in the insurance brokerage industry whereas non-competition clauses are not. See, for example, Valley First Financial Services Ltd. v. Trach, [2004] B.C.J. No. 1127 (C.A.).

[59] It follows from my determination that the Restrictive Covenant is not enforceable that Stevenson & Hunt are not liable for inducing a breach of contract.

For the full text of the Court of Appeal's ruling, see: H.L. Staebler Company Limited v. Allan, 2008 ONCA 576 (CanLII)

- Garry J. Wise, Toronto

Visit our Toronto Law Firm website: www.wiselaw.net

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