Canadian courts continue to struggle with clauses in employment contracts that contain post-employment noncompetition and nonsolicitation clauses, known as “restrictive covenants.” This is an important issue in Canada, where there is no concept of “at will” employment, and all employees are deemed to have some form of employment contact. But not all terms are equally enforceable.
The recent split decision of the Alberta Court of Appeal in Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240, provides an interesting reminder of the uncertainty in the law in this area. It also provides good lessons to those who want employees to agree to such restrictions.
In Globex, three employees had contracts with noncompetition and nonsolicitation clauses. For one employee, the terms were included in the hiring contract. The other two were asked to agree to the restrictions after they were hired. All three later left Globex and joined a competitor.
Scenarios considered by Alberta Court of Appeal
1. Is a restrictive covenant enforceable if the employee has been wrongfully dismissed? The majority of judges ruled that an employee who has been wrongfully dismissed is not bound by post-employment contractual restrictions. In their opinion, “an employer that wrongfully terminates a contract of employment should not be able to capitalize on its failure to give notice or damages in lieu of notice by enforcing prospective obligations against an innocent employee.”
The dissenting judge disagreed. This judge said that effect should be given to the intention of the parties. That includes their agreement that the restriction would be in effect following termination “for any reason.” Otherwise, such clauses would be largely meaningless.
The dissenting judge also took issue with the majority’s position that it would be “morally unjust to permit an employer to recoup the benefit of such a covenant after it has acted reprehensibly by repudiating the contract.”
The Canadian legal concept of “wrongful dismissal” includes termination where insufficient notice or pay in lieu of notice of termination has been given. It also includes termination done for cause, where the employer had a good faith belief that cause existed but a court later concludes otherwise. The dissenting judge reasoned that it is simply inaccurate to say that the term “wrongful dismissal” suggests a moral wrong or reprehensible conduct.
2. When can an employer impose a restrictive covenant after an employee has started employment? It is a basic principle that one person cannot unilaterally impose an obligation on another. To have an enforceable agreement, there has to be “consideration.” For example, if the employer says, “I will give you $100 if you agree not to work for a competitor for six months,” the $100 is consideration for the promise not to compete. Similarly, if the employer says, “I will give you a job if you agree not to work for a competitor for six months after you stop working for me,” the new job is consideration for the promise not to compete later.
What if the employer asks the employee to sign a noncompetition agreement after the employee has started in the job? Mere continuation of employment is not consideration. It does not provide any additional value in exchange for the new obligation.
What if the employer says, “I will fire you unless you agree to this noncompetition obligation”?
The law across Canada is mixed on this question. Some courts have said that if there is a real risk of losing one’s job, the offer of continued employment is good consideration.
The majority in Globex ruled that continued employment was not good consideration. “Sign or resign” does not provide any new consideration for the new obligations.
The dissenting judge disagreed. He said the evidence showed that the employer refrained from exercising its right to terminate the employee’s employment because the noncompetition agreement was signed. That was good consideration.
3. How do you know whether a restriction is overly broad or ambiguous? Both the majority and the dissenting judge make it clear that you must look at the words in the contract and not the conduct of the employees. It was not disputed that the employees joined a competing company. But the judges looked only at the language of the restrictive covenants. They had a number of concerns about them:
The nonsolicitation covenant, for example, purported to prohibit soliciting customers from any client of Globex with whom the employee had “dealings.” The term “dealings” was uncertain. It was not clear whether all those clients of Globex were in the same line of business. Thus the defined group could be overly broad. In addition, the clause was uncertain as it appeared to refer to soliciting customers “for” any client of Globex, which did not make sense. Such ambiguities made the clause unenforceable.
5 Take Aways for Employers
- Restrictive covenants must be drafted carefully, with a view to protecting only the critical business interests of the employer.
- Over-reaching will make restrictive covenants unenforceable.
- Ambiguity will make restrictive covenants unenforceable.
- If you want to have your current employees agree to post-employment restrictions, you should offer fresh consideration. “Sign or resign” may not be good enough.
- A wrongful dismissal might make that employee’s restrictive covenants unenforceable. So employers should take great care both in making the decision and in the manner in which it is carried out.