Employment & Labour

The non-compete clause and employee poaching

By Bram Lecker and Kimberley Sebag

Employers commonly include a non-compete clause in their offers of employment. Legally, the non-compete clause is referred to as a “restrictive covenant.” It attempts to restrict your trade by limiting your ability to work for a competitor or start a competitive business.

Such clauses are one-sided and used solely to benefit employer interests. Rightfully, they want to protect the investment they make in you along with their intellectual property. Yet, you might worry about signing such documents. After all, it is quite intimidating to have a new employer wield so much power on your future means to earn a living. This clause will also be top-of-mind in situations of employee poaching if you are considering jumping ship because of an advancement opportunity with a competitor.

Fortunately, Canada has a market-oriented system where competition is encouraged. For the most part, the law will not uphold clauses that narrowly limit your rights to work in your field of choice.

Non-compete clause – leading case

In 1978, the Supreme Court of Canada heard the leading case in this matter. In 1958, an insurance agency purchased the insurance business of a competitor, who also sold real estate and other products. They imposed a restrictive covenant on the business which prevented them from engaging in the insurance business for 10 years in the Niagara region. Shortly after, they hired the competitor as their manager. And they imposed yet another a non-compete clause in his employment contract. This one prevented him from setting up a competitive insurance business while employed with the company, and for five years after termination of his employment.

17 years on, the competitor did just that! He quit and set up his own insurance business, taking three employees with him and almost half of the insurance agency’s clients. The insurance agency sued. The case went all the way up to the Supreme Court of Canada. The judges assessed whether the insurance agency had overreached in the formulation of the non-compete clause. They wanted to demonstrate a balance between maintaining free and open competition in business and interfering with an agreement between two knowledgeable parties.

Incredibly, they ruled in favour of the competitor! They concluded that the clause, as drafted, was too broad and sweeping. It restrained competition and interfered with his right to work in his trade. They rendered it unenforceable.

Limiting the non-compete clause

Today, these precedents are well established. Restrictive covenants are usually void and unenforceable unless they are reasonable and in the public interest. Employers cannot stifle competition by limiting the temporal and spatial features. Canadian courts will throw out any employment agreement with a broad non-compete clause that restricts you from working for an extended time or within an unreasonably large geographical area. They are enforceable if short, for six months or less, for example. And the geographical restrictions, too, must be specific. We have seen non-compete clauses that restrict employees from working in the province and even the entire country. These would never stand up to a legal challenge.

In addition, employers engaging contract workers or employees on a limited, fixed-term basis would find that a non-compete clause is unenforceable during the employment term, after termination and beyond.

Jumping ship

Employee poaching is common in industries with a growing demand for highly skilled talent. The practice is understandably detested by employers. At one time in the U.S., tech sector giants agreed among themselves not to poach each others’ employees. But this arrangement was short lived. The Department of Justice shut it down because it limited employees’ opportunities for career advancement and income growth.

In Canada, employee poaching is, for the most part, legal. You may pursue opportunities with the competition to the extent permitted by the non compete clause in your employment agreement. As noted above, you will have no problem if your non-compete agreement is unenforceable. However, you should seek legal advice before you resign, and not after.

Headhunters and employee poaching

You have an obligation to disclose your non-compete obligations to any headhunter who comes calling. In fact, if the headhunter has also approached other colleagues, then they may be “raiding” your workforce. While this is legal, it is unethical, and you should be wary. You should also be cautious of headhunters who make grandiose promises and especially those who do not take no for an answer. These could be signs of desperation and the grass may not be greener on the other side.

If you do, in fact, consider a competitive offer, you must review the new employment contract closely. Some employers require you to disclose any non-compete obligations you hold with your former employer.

Also, by jumping ship, you step into the unknown. Every so often, headhunters poach employees who are quite satisfied in their existing position. If things do not turn out the way you expected, you may not have the opportunity to return to your old job.

Stealing proprietary information

In this situation, you must also be mindful that you are not free to take with you existing contacts, customers, trade secrets and intellectual property. This will likely spell trouble for both you and your new employer, as demonstrated in this case.

The employee joined the company in 2005 to provide financial advice to their clients. The company furnished him with a list of clients who were primarily physicians and their families. His employment agreement included a non-solicitation clause that prevented him from doing business with these clients for two years after his termination.

In 2013, he left with another colleague to join another company. While his new employer expected him to build his own business from scratch, his compensation was based on a percentage of the fees he generated. He was, therefore, very motivated to contact his former clients and migrate them to the new company.

The trial judge did not take kindly to these actions. He found that the employee had not built the client list at the company from scratch. In fact, he stole the company’s intellectual property by contacting the same people when he moved jobs. Secondly, he did not find the two-year limitation unreasonable. The company was quite specialized with their physician clientele. The “cooling off” period was reasonable to ensure former advisors did not lead those clients away. And finally, he ruled that the non-solicitation clause did not limit the employee’s ability to work in his field. He could have solicited physicians who were not clients, or even clients he had not personally worked with. He found the employee vicariously liable for damages along with his new employer, for encouraging him.

Fiduciary officers

In a similar manner, you could face legal challenges if a former boss leaves and poaches you. This is especially true if he or she held a senior position or fiduciary responsibilities at the former employer. Common law places greater restrictions on fiduciary officers compared to regular employees. These restrictions stand even when no employment agreements exist. Fiduciary officers are explicitly prevented from poaching co-workers for a reasonable period of time, determined on a case-by-case basis.

Seeking advice before you sign

Employers wield a lot of power during the negotiation phase of an employment relationship. Almost always, they require a signed employment agreement as a condition of employment. If yours contains a non-compete clause, do not let it dampen your spirits. The best time to seek legal advice about its implications is before you sign it. Even though many restrictive covenants are not enforceable, our lawyers will help you understand the limitations your new employer is imposing upon you. This will arm you with information about your obligations and rights so you can make proper decisions for yourself.

Employment relationships should never begin with terms that make you uncomfortable or uncertain about the future. Contact us for a review of your employment agreement and non compete clause. It generally takes an hour. This upfront consultation will be vastly cheaper than a legal challenge afterward, where you will have to rely on a judge to clear up the matter.

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