Many salespeople find themselves signing “non-compete” agreements when they take a job. But what they actually mean is often a source of disagreement.
Recently, an Alberta court ruled that if you are wrongfully dismissed, the agreement not to compete with your former employer is void. Employers must also limit their control over former employees — they can’t nail their feet to the floor with overly broad, vague non-competes that place unfair limits on the former employee’s ability to earn a living.
Says Thora Sigurdson, an employment lawyer with Fasken Martineau DuMoulin LLP in Vancouver: “The biggest problem is that most employers overreach. They want to have someone kept out of the field for one year, two years, three years. And that, itself, is usually problematic.”
Understanding this issue can be crucial for those, including financial advisors, whose success depends on developing relationships with their clients. Typically, these non-compete agreements within employment contracts (known as “restrictive covenants”) try to prohibit employees from taking client lists with them when they leave the company or from soliciting a former employer’s clients for certain periods of time and in certain geographical areas.
These clauses are often effective, but it appears that the courts are getting stickier about how these contracts are drafted and when they will be void. In the Alberta case, three foreign-exchange traders had left their employer, Edmonton-based Globex Foreign Exchange Corp., to set up shop on their own. All three were rookies when they started at Globex in the early 2000s but were accomplished traders by the time they left in late 2004 and the spring of 2005. They did not take any confidential information with them but subsequently did deal with some of Globex’s clients.
One of the traders had signed a non-compete before being hired but refused to sign another, more stringent agreement before resigning from the company. The other two signed non-competes after starting in their jobs at Globex. One of the three had been wrongfully dismissed.
The non-compete read, in part, that employees could not solicit customers in any manner, “in any business or activity for any client of Globex with which he/she had dealings on behalf of Globex at any time” in the 12 months before leaving Globex.
The Alberta Court of Appeal held the clause “did not meet the test of reasonableness” that courts use to decide whether such agreements are enforceable.
Justice Constance Hunt found that the word “dealings” was too ambiguous, as it could, for instance, mean almost any sort of interchange on the phone. Hunt also noted that it was unreasonable for Globex to prevent the solicitation of its customers for “any business,” not just foreign exchange.
Two of the three-member panel of judges also concluded that employees who are wrongfully dismissed (not fired for cause or paid an appropriate amount in lieu of notice) are not bound by non-competition clauses. In her reasons, Hunt noted: “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.”
If an employee is to be dismissed, an employer should be very cautious about the notice period that is given, warns Sigurdson: “Obviously, employers don’t want to pay more than they have to. But if they pay 10 months and a court finds out it should be 12 months, they’ve wrongfully dismissed the person.”
The Globex decision underscores the ongoing uncertainty surrounding the use of restrictive covenants and the circumstances in which courts will enforce them. Says Sigurdson: “The court has highlighted the very high threshold an employer has to meet and the necessity of examining very carefully what the core business value is that you need to protect by this restrictive covenant. The majority said the fact that the clause referred to clients the employee had dealings with was too vague.”
But, she adds, “that language has been used in restrictive covenants for a long time, and it’s intended to capture the people they have actually worked with.”
Employers must draft non-competes to avoid ambiguity. They should protect only the employer’s critical business interests. “If you want it to be enforceable, you really can’t rely on boilerplate,” says Sigurdson. “Drill down and consider the facts, core values and core business interests.”
Globex also lost on another front: the court found it was not entitled to ask current employees to sign non-competes without also offering some additional incentive. The promise of continued employment alone — “sign or resign” — does not amount to such an incentive.
Sigurdson says employers can improve their non-competition agreements by asking questions about the specific situation when the person is hired. Such questions, she suggests, could include: “What are the nature of their clients? “Did [the employee] come into the business with a book of business or are they getting all of their information from the new employer? Do they have a specific niche practice that they were brought in to support? Is it the kind of business where a decision will have an effect across Canada or North American markets?”
Adds Sigurdson: “Look at the market, look at the nature of the business, look at the relationship between the investment dealer and the salesperson and the clients. Is it one person who has all the connections or [can] anybody who picks up a phone book get those connections?” IE