DO DEPARTING EMPLOYEES OWE ANYTHING TO THEIR EMPLOYERS ONCE THEY LEAVE?
Four key factors need to be considered, Howard Levitt and Peter Carey write.
In past musings, we have often commented on the remedies employees have against their employers, particularly upon leaving their jobs. Employers also have rights when employees depart, even when those employees are fired. The problem is employers frequently overestimate the obligations owed to them by departing employees, when only four have been deemed to be enforceable:
■ If the employee has a contract with an enforceable non-competition clause, that contract may remain effective.
■ The employee cannot have competed with their former employer while still under their employment.
■ If the departing employee was a fiduciary of the employer, they may still owe some obligations to the employer.
■ An employee can never misuse confidential information belonging to their employer, even after they depart.
Let's look at these obligations individually:
Most employment contracts have non-competition clauses that are wildly overreaching. Non-competes are regarded as restraints of trade and are prima facie unenforceable. Courts do not like enforcing them, except when the non-compete clause is commercially reasonable to protect the interests of the employer, and even then, the protections must be temporally and geographically restrained. Generally, in employment contracts, less is more. If you have a non-compete that effectively prevents your employee from working anywhere in the country for five years, it is unenforceable and not worth the paper it is written on. In our combined 90 years of experience, we have only seen perhaps a dozen non-competes enforced by the courts, and they were enforceable precisely because they were modest in restricting the activity of the departing employee.
It goes without saying that an employee cannot compete with their employer while working for them. If an employer discovers that an employee has set up shop and is diverting or otherwise undermining their business interests, the employer will be able to recover damages from the employee and potentially restrict their ability to compete through an injunction. Note, however, that several cases have held that an employee can prepare to compete, as long as they don't actually compete. Your employee might set up a new corporation, hire an accountant, design a web page — do everything apart from carrying on a competing business — and still be OK. However, they should not do it on the employer's time or using its equipment.
There is always much controversy around whether a departing employee was a fiduciary of the employer or not. A fiduciary is someone who must put the interests of their employer above their personal interests. In some cases, the answer is obvious: if the employee was a director,
CEO or president of the company, they were a fiduciary. Other employees may be fiduciaries if, by virtue of their position, the employer was uniquely vulnerable to them, but this is highly factually dependent. Furthermore, an individual's fiduciary activities may not be as restricted as you might think. In some cases, they may simply be unable to solicit their former employer's customers for some “reasonable” amount of time.
Finally, we come to the contractual obligation an employer has the greatest probability of enforcing. A departing employee may never — that is right, never — use their former employer's confidential information. An employer does not even require a clause to this effect in the employment contract. It is a common-law requirement that employees not commit a breach of confidence. That said, the information in question must be confidential. Is your client list truly confidential, or does everyone in the industry know who is on it? Are your technical drawings truly secret and proprietary? (We frequently win injunctions by demonstrating that so-called “secret” information is available to anyone who asks for it.) Providing that your information really is confidential, you are entitled to protect that interest and the courts will restrain those who breach that obligation.
So, there you have it. Employers have rights, too, though perhaps not as many as they'd like. Employers should keep in mind that, when it comes to contracts, modest post-employment restrictions are more likely to be enforced than draconian clauses, which will never find favour with the courts.
Financial Post Howard Levitt is senior partner of Levitt Sheikh, employment and labour lawyers with offices in Toronto and Hamilton. He practises employment law in eight provinces and is the author of six books including the Law of Dismissal in Canada. Peter Carey is a partner at Levitt Sheikh.