Canada: Protecting Your Business From Departing Employees

Last Updated: November 14 2008
Article by Derek Knoechel

Sophisticated employers recognize that the potential costs associated with employee attrition extend far beyond resources expended to replace departing employees. Employee departures can also place critical business assets at risk. A departing employee may engage in the unauthorized use or disclosure of confidential information ranging from technological know-how, product roadmaps and marketing strategies to client and supplier lists and data regarding client preferences and feedback. Departing employees may also interfere with the employer's relationships with customers, suppliers, and other employees, using personal connections developed in the course of employment.

[CALLOUT: "Departing employees are free to compete against a former employer ... provided that they abide by their obligation to hold confidential information in confidence and abide by any other contractual or fiduciary duties that survive the termination of employment."]

The Supreme Court of Canada recently released its reasons in RBC Dominion Securities v. Merrill Lynch Canada et al., 2008 SCC 54 - a case involving a mass defection of the employer's sales force to a competitor. The Court confirmed that employees are entitled to compete against a former employer immediately upon the termination of their employment provided they abide by their obligation to hold confidential information in confidence and abide by any other contractual or fiduciary duties that survive the termination of employment. So what strategies can employers utilize to manage the risk associated with employee departures?

Confidential Information & Breach of Confidence

While courts tend to support employee mobility, they generally denounce employee attempts to misappropriate confidential business information. Courts have long recognized the commercial necessity of protecting confidential information from misappropriation and will typically impose an obligation of confidentiality upon employees even in the absence of express contractual language to this effect.

An employee's obligation of confidentiality will generally survive the termination of employment provided that the information in question retains its "confidential" character. What, then, defines, "confidential information"?

A policy or contractual provision defining what is "confidential" is helpful, but will not necessarily oust the court's role. Courts will consider: (a) the value of the information (to both the employer and to competitors); (b) the extent to which the information is distinct from information available in the public domain (e.g. how "secret" it is); and (c) the extent of measures taken by the employer to guard the secrecy of the information.

[CALLOUT: If the information is valuable and secret, and the employer takes commercially reasonable measures to keep it secret, courts will generally grant legal remedies against individuals that try to take it.]

Employers who do not take sufficient steps to maintain the secrecy of such information may well be left without a remedy. Employers who adopt - and consistently enforce - policies regarding the protection of proprietary information will generally have an easier time establishing that the information it seeks to protect is truly confidential and worthy of legal protection.

Such policies can take many forms depending on the nature of the employer's business, but should include restricting access to confidential information only to those individuals who truly "need to know" as part of their duties. Certainly, Coca-Cola's trade secret cola recipe is treated differently than its marketing plan for the upcoming year, which is, in turn, treated differently than a list of current suppliers of fructose.

Confidential information should be confined to the workplace. When it must leave the premises (in either paper or electronic form), measures should be taken to reduce the risk of release into the public domain as this can lead to a loss of confidential status. Employers who have an established policy should keep records of regularly signed and dated employee acknowledgements of the policy and any amendments.

Protection of Commercial Relationships & Goodwill via Restrictive Covenants

Employers seeking to protect commercial relationships and goodwill may turn to restrictive covenants such as non-solicitation and non-competition clauses. However courts will view all such clauses as illegal and unenforceable unless they are persuaded that the restrictions are both reasonable and reasonably necessary in all of the circumstances. An employer must establish that it has a legitimate proprietary interest that it seeks to protect. Any restraint designed to protect this interest must be reasonable with respect to the time period during which it operates, the area covered and the activities prohibited.

Courts are concerned about an imbalance in bargaining power between employer and employee and will generally assume that there was little "negotiation" over such terms. Accordingly, the employer will be required to establish that the provision is fair and reasonable in all of the circumstances. Courts are generally more willing to enforce a non-solicitation covenant as opposed to a non-competition covenant and require restrictions to be focused. A "one-size-fits-all" approach will rarely be successful, as courts will cite ambiguous or overly broad language as grounds for striking down the provision.

An oft-overlooked requirement is the provision of a substantial benefit or "consideration" to the employee in exchange for the covenant. The amount of consideration required will vary, and types of consideration may include offers of employment, promotions, rights to participate in incentive plans (e.g. stock options), or significant lump sum cash payments. In each case, however, it must be made clear that receipt of the benefit by the employee is conditional upon the employee agreeing to the covenant. The employee must be given a reasonable period of time to review the covenant and the opportunity to seek legal advice regarding its terms.

Finally, courts will not view the restrictive covenant in isolation, but will consider "all of the circumstances" surrounding the employment relationship. Employers should consider how they might improve their chances of success should the covenant ever be litigated. For example, where an employer seeks to enforce a restrictive covenant intended to protect a book of business or customer goodwill, the chances of success will generally improve if the employer can clearly establish that it has paid for and owns all applicable rights. Employers might consider compensation models that include terms that make it readily apparent that employees relinquish any rights in and to client accounts brought to the firm. Of course, any such terms must also be seen as fair.

The take-home message is that where an employer can establish that employees have been fully and fairly compensated for bringing clients in the door, the more likely it will be that a court will uphold "reasonable" language intended to prevent employees from trying to take the clients with them when they leave.

Fiduciary Duties

Courts exercise considerable caution when asked to impose fiduciary duties upon former employees. Indeed, employers tend to navigate such murky waters only when all else has failed, since the law regarding fiduciary relationships and duties flowing from such relationships is complex and awash with uncertainty.

Fiduciary duties are derived from trust principles and require that employees put the company's interests ahead of their own. Employees who owe such duties may be restricted in their business activities for a "reasonable" period of time following the termination of employment.

Given the potentially broad and inherently uncertain scope of such obligations, the courts will only imply such obligations in the clearest of cases (e.g. employees who are senior management or "key" to the business - although the concept of a "key employee" should not be stretched too far) and where it is both fair and necessary to do so. If an employer is of the view that a particular position may give rise to fiduciary duties, it should confirm and outline these duties in a written employment contract rather than relying on the uncertain scope of the common law.

An Ounce of Prevention

Employers should continually assess the risks associated with potential employee departures and consider what strategies might be appropriate to mitigate them. While several legal options are described here, employers may also wish to implement human resources measures such as employee retention initiatives and the use of client teams (as opposed to exclusive contact between employee and client) as a means of reducing the frequency and negative impact of departures. Employers will likely find that a combination of customized risk management strategies is well worth the effort.

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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