Canada: How To Best Protect Your Business From Departing Employees

Businesses often seek to minimize the potential harm that can be inflicted by former employees after they leave employment. Regardless if an employee is currently working with your company or departing (either on good or bad terms), your company may have exposure to a number of risks, including the risk that they may set up a competitor or steal your employees, clients, property or confidential information. There are a number of contractual options which can be put in place to assist in protecting your business, however.

(i) Restrictive Covenants

A business can use restrictive covenants to protect its interests by prohibiting former employees from either competing or soliciting (customers or employees) for a defined period of time. However, as between the parties, restrictive covenants are presumptively unenforceable unless it can be shown that they are reasonable and so it is important that they are drafted with care. To be enforceable, a restrictive covenant in an employment contract must be reasonable in terms of: (i) geographical scope; (ii) duration; and (iii) subject matter. In contrast, in the commercial context, where the parties are negotiating on more equal terms, restrictive covenants are enforceable unless they are unreasonable.

More recently, businesses have sought creative ways of drafting restrictive covenants to protect their interests in order to overcome their presumptive unenforceability. In the recent case of Rhebergen v. Creston Veterinary Clinic Ltd.,1 the British Columbia Court of Appeal considered an "unconventional" restrictive covenant that did not restrict the former employee from competing outright, but imposed a financial "penalty" on the employee if she did. The Court determined that the covenant was reasonable as it was not ambiguous and was not a penalty because it was a genuine pre-estimate of losses. This case indicates that courts may be more willing to enforce clauses that impose financial penalties on competing rather than barring it outright, provided some thought has been put into the amount of the "penalty".

(ii) Return of Property Clauses

Another way to protect your business interests is to contractually stipulate that an employee has a duty to return the business's property upon the termination of employment. While fairly obvious, including a provision in an employment agreement will make enforceability easier and can be tailored to the particular type of property. If your former employee refuses to return a laptop, for example, which contains important software or confidential information, it will be imperative to show that he or she is acting in breach of contract in doing so.

(iii) Confidentiality Clauses

In the course of their work, employees often learn or have access to confidential information about their employers' businesses. Non-disclosure or confidentiality clauses can define the rights and remedies of your business if an employee discloses confidential information – such as client information, trade secrets, or other intellectual property – to outsiders.

One way businesses can protect their confidential information is by including confidentiality obligations in their offers of employment. For example, in the recent British Columbia case of Phoenix Restorations Ltd. v. Drisdelle,2 Phoenix sought an interlocutory injunction to restrain two former employees from using confidential information, including lists of suppliers, estimates for customers, marketing presentations and email communications with specific customers. The court, in reviewing the confidentiality provisions in Phoenix's offer of employment, noted that at an interlocutory stage restrictive covenants need to be more rigorously tested and scrutinized as compared to confidentiality clauses. Further, the court noted that irreparable harm would result from confidential documents being released. This case highlights the effectiveness that well drafted confidentiality clauses have in protecting confidential information.

To be enforceable, confidentiality clauses must be explicitly drafted to include any information that is particularly important to your business. This will vary from business to business, and all types of proprietary and confidential information should be considered for inclusion. If an employee ever uses or discloses such defined information inappropriately, courts generally will be prepared to uphold and enforce confidentiality clauses, and may award compensation and other remedies to the employer such as an injunction prohibiting the employee from using or disclosing the information to third parties.

Conclusion

Well-drafted employment contracts will maximize the likelihood of enforceability in the event a departing employee engages in unfair competition. Contracts should be drafted to specifically address the needs of your business and regularly updated in order to minimize potential harm to your business.

Footnotes

1. 2014 BCCA 97.

2. 2014 BCSC 1497.

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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