Canada: Non-Competition Provision Results In Increased Notice Period

In the recent case of Ostrow v. Abacus Management Corporation Mergers and Acquisitions, 2014 BCSC 938, the B.C. Supreme Court followed an approach taken in a small handful of cases (predominantly out of Ontario but including an appellate case out of B.C.) and confirmed that a non-competition provision may well result in an increased notice period for a wrongfully dismissed employee.

Facts

Adam Ostrow worked for Abacus Management Corporation Mergers and Acquisitions ("Abacus") as a specialist in US taxation. His employment lasted for the nine month period from March to December 2011.

Ostrow's employment with Abacus was terminated without cause with immediate effect. He was provided with one week's pay in lieu of notice. This was the statutory compensation for length of service to which he was entitled under the B.C. Employment Standards Act.

In a letter provided to him on termination of his employment, Ostrow was specifically cautioned about the non-competition provision in his employment contract. He was also verbally reminded by the Human Resources manager at Abacus of the provision which "restrict[ed] him from working for other employers" for a period of six months.

Ostrow became re-employed 16 months after his dismissal from employment. On the new job, his pay was 30 percent less than at Abacus.

Ostrow sued Abacus for wrongful dismissal. Because Abacus chose not to dispute liability (a wise strategic decision in the writer's considered view), the only issue before the Court was the amount of damages arising out of the wrongful dismissal.

Decision of B.C. Supreme Court

The Court found that Ostrow was entitled to "damages in lieu of notice in the amount of six months' pay which include[d] benefits, Canada Pension Plan contributions, and bonus". While there are other interesting aspects of the Court's decision, the part of the decision that warrants special attention is the effect of the non-competition provision on the notice period.

The Court began by observing that the limited case law on point was consistent in holding that "a non-competition clause in the employment contract is a factor which may increase the length of the reasonable notice period".

The Court then ruled that the non-competition provision in Ostrow's contract increased the notice period to which he was entitled. It rejected Abacus' submission to the effect that it did not seek to enforce the restrictive covenant against Ostrow and had never before "taken legal action against an employee with regard to the violation of such a covenant". The question, the Court said, was whether Ostrow had reasonably believed he was bound by the restrictive covenant. The Court held:

The Court did not specify how much the notice period was increased because of the non-competition provision in Ostrow's contract. It is, however, interesting that the length of the notice period to which he was found to be entitled exactly matched the temporal duration of the restrictive covenant.

As well, it is interesting that the Court did not hold Ostrow to a particularly exacting standard when considering whether he had taken reasonable steps to mitigate the loss flowing out of termination of his employment (as he was legally obligated to do). In light of Ostrow's "belief that he was bound by a non-competition clause", it was reasonable, the Court held, for him to "self-restrict his mitigation efforts" and take "more than the normal time to right himself".

Take-Away Points for Employers

Human Resource practitioners who work with employers have been handed one more reason to approach non-competition provisions with caution.

Think carefully about whether a non-competition provision should be incorporated into an employee's employment contract in the first place. Regardless of the actual enforceability of a non-competition provision, consider whether you will remind a departing employee that he or she is bound by the non-competition provision in his or her contract. Perhaps even give thought to whether you will provide the departing employee with notice that there will be no attempt at all to enforce the non-competition provision against him or her following termination of his or her employment.

Above all, if you have any questions at all regarding a non-competition provision (or any other restrictive covenant for that matter), the desirability of incorporating such a provision into an employment contract and the overall business and operational implications, it is prudent to contact a reputable employment lawyer who can provide you with the necessary legal advice.

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.