Tag Archives: employment law

The Latest on Non-Competition Covenants

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On December 2, 2021, the Working for Workers Act, 2021, came into force. The Act prohibits non-competition clauses in employment or other agreements except in the context of a sale of the business, or if the employee operates at an executive level. The effective date of the Act is October 25, 2021. The Court has held that it does not apply to agreements entered into prior to that date.

Non-competition clauses have always been fertile ground for litigation simply because many employers consider them vital to their business. But, they are also very difficult to enforce. At the end of the day, at common law, the enforceability of such clauses depends on whether or not a court considers them reasonable. For that reason, it is important for both employers and employees to give careful thought to how a Court will make that determination when negotiating the terms of a non-competition clause.

In the recent case of M & P Drug Mart Inc. v. Norton and Whitehead Pharmacy Ltd., the Ontario Court of Appeal took the opportunity to review this process.

Norton, a pharmacist, had been the pharmacy manager of a pharmacy owned by M & P in Huntsville, Ontario. His employment agreement contained a non-competition covenant. The clause in issue provided that for one year after the termination of Norton’s employment for any reason, he would not “carry on, or be engaged in, concerned with, or interested in, directly or indirectly, any undertaking involving any business the same as, similar to, or competitive with the business within the 15 km radius of the business located at 10 Main Street East, Huntsville, Ontario”.

The agreement also provided an acknowledgement on Norton’s part that the clause was necessary to protect M & P’s legitimate business interests and was reasonable in the circumstances.

Norton resigned and became an employee at a pharmacy less than 3 km away.

M & P sued Norton and the matter was determined by Application. The Application judge found the covenant to be unreasonable and therefore unenforceable. The Application was dismissed. The decision was appealed to the Court of Appeal, which dismissed the appeal.

The Court of Appeal began its analysis by observing that, as a general rule and on public policy grounds, a non-competition clause is unenforceable unless it is reasonable considering the interests of the parties and the public based on the circumstances at the time that the covenant is made. In order to determine whether the clause is reasonable, the Court will consider the extent of the activity to be prohibited, the geographic coverage of the restriction, and its duration. The covenant must be clear as to activity, time and geography. If it is ambiguous on any of these factors, it is likely to be considered unenforceable simply because the ambiguity will make it impossible to show that it is reasonable.

If the covenant is clear and unambiguous, it will then be assessed for reasonableness. The Court will not rewrite the covenant in accordance with what it thinks is reasonable. If it is unreasonable, the Court will simply decline to enforce it.

In this case, M & P argued that the clause merely restricted Norton from working as a pharmacist for a pharmacy or a store that includes a pharmacy. However, the words contained in the clause went well beyond this restriction. In the view of the Court, the covenant would have prohibited Norton from working in a job at a supermarket, for example, that included a pharmacy department, even if his job was in a completely different department and he was not employed as a pharmacist. Furthermore, Norton would have been prevented by the clause from being a passive investor in any such business.

As it happens, Norton did become re-employed as a pharmacist. Nevertheless, as the clause included activities beyond working as a pharmacist, it was considered overly broad and, therefore, unenforceable.

The jurisprudence is filled with cases in which a non-competition clause was found to be unenforceable. This is because historically, employers have insisted on protections well beyond what is truly necessary, thinking that inclusion of an acknowledgment by the employee that the employer’s concerns are reasonable will preserve the clause.

While the number of such cases will start to decrease given the new legislation, the vast majority of contracts existing today that include such clauses will not be subject to the legislation. They will continue to be litigated, and Courts will continue to be vigilant in protecting the ability of employees to make a living elsewhere unless the clause restricting the new employment is eminently reasonable.

Even with the new legislation, the common law will apply to “executive” employees. In addition, this issue will arise in the context of the sale of businesses. In the latter cases, while the attitude of the Court has always been more generous to parties seeking to enforce non-competition covenants, the issue of reasonability will continue to be one to which attention must be paid.

Can an Employer Enforce Onerous Clauses in an Employment Agreement?

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The recently-decided case of Battiston v. Microsoft Canada Inc. is a useful reminder to employers to specifically draw a prospective employee’s attention to clauses in a proposed employment or related agreement that might later be found by a Court to be unusually onerous.

In this case, Battiston was employed by Microsoft for almost 23 years until his employment was terminated without cause in 2018.

Every year, in addition to his salary, Battiston had received benefits such as pay increases, bonuses, and stock awards.

When he was terminated, Microsoft took the position that Battiston was no longer entitled to the vesting of any stock awards that were granted but had not yet vested.

While the lawsuit involved several issues, the one of particular interest has to do with whether or not Microsoft’s position on the unvested stock awards was justified. Battiston took the position that he was entitled to all previously-granted stock awards that would have vested during the notice period had proper notice been given.

The stock awards were an integral part of Battiston’s compensation. In considering whether the loss of that benefit was recoverable, the Court pointed out that a two-step analysis is required. Firstly, the Court will determine the employee’s common law right to damages for breach of contract by assessing the amount to which the employee would have been entitled had proper notice been given. Secondly, the Court will consider the terms of the relevant employment agreement or plan to determine whether any clauses are taking away what would otherwise be the employee’s common law rights.

In this case, Microsoft issued Stock Award Agreements annually. They provided for stock awards vesting in various increments each year. At the date of his termination, Battiston had over 1,000 awarded but unvested shares. Had he been given proper notice, they would have vested during that time period.

The Stock Award Agreements included a provision that, in the event of the termination of Battiston’s employment, his right to unvested stock awards would terminate and would not be extended by any contractual or other notice period

At trial, Battiston testified that he did not read these Agreements, nor did Microsoft draw his attention to the termination provisions in them. He stated that he had been under the impression that he would be eligible to cash out his granted but unvested stock awards in the event of a termination without cause.

Microsoft relied on the termination provisions in the Stock Award Agreements, arguing that they specifically removed Battiston’s common law entitlement to the unvested stock awards.

The Court found that without a doubt, the provisions excluded his right to vest his stock awards following termination. However, that is not the end of the story. The Court referred to a number of Court of Appeal cases decided over the last number of years in which exclusion clauses in contracts were found to be unenforceable because the party submitting the document for signature failed to draw to the other party’s attention to terms that the Court would consider to be harsh and oppressive.

This philosophy applies to employment relationships, as well.

In this case, the Court determined that the termination provisions in the Stock Award Agreements were harsh and oppressive. They had not been brought to Battiston’s attention. For that reason, they could not be enforced against Battiston and he was entitled to damages in lieu of the unvested shares.

Unfortunately for employers, it is not always easy to predict what provisions will be found to be harsh and oppressive by a Court. Given that, presumably, stock awards are granted as an incentive to an employee to do what they can to increase company profits, there would be some logic behind Microsoft’s position in this case. Nevertheless, this case is a reminder to employers that, if an employment contract or plan document extinguishes the right of an employee to benefits immediately upon termination, very serious consideration should be given to specifically pointing out those provisions to the employee at the outset of the relationship.

When Can an Employment Agreement be Voided for Duress?

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The recent decision of the Ontario Superior Court in Riskie v. Sony of Canada Ltd. provides a useful reminder of the way in which the court will deal with an employment agreement where the employee later complains that he executed the agreement under duress.

In this case, Mr. Riskie was a management level employee of Sony of Canada Ltd. based in Toronto. He began working at Sony in 1989 without a written employment agreement. He lived and worked in Toronto.

In the spring of 2014, after having worked at Sony for about 25 years, he announced that his wife had obtained new employment and that he and his family were planning to move to Ottawa. He asked whether he could continue in his existing job from his home in Ottawa notwithstanding that there were a number of Toronto-based employees reporting to him.

While Mr. Riskie’s immediate superior was supportive, Sony’s President and CEO was opposed to the idea.

Mr. Riskie planned to move to Ottawa in mid-June 2014, even though he knew of senior management’s opposition to the idea of his continuing to work from there. Several days before the move, his immediate superior advised him that Sony would consider accommodating his request but would require that his position change from that of an indefinite employee to a contract employee with a fixed term, as a condition of approving the arrangement.

Mr. Riskie was given a proposed contract with a fixed term ending December 31, 2014, with no renewal rights. He was able to negotiate the end date to March 31, 2015. He asked for a right to renew the contract unless he failed to prove that the new arrangement could work, but that request was denied. Ultimately, he signed the contract after he had already moved to Ottawa. At no time was he ever told that he could not remain in Toronto and continue in the same capacity as before by, for example, commuting to Ottawa on weekends.

Mr. Riskie proceeded to carry on his previous duties remotely from Ottawa. Several months later, Sony announced internally that its North American operations were being reorganized. A number of people were let go in February 2015 and at that time, Mr. Riskie was told that his contract would not be renewed on its expiration date.

At that date, he was provided with all of the benefits called for under his fixed term employment agreement. Mr. Riskie responded by suing Sony for wrongful dismissal, saying that the employment agreement was void for a variety of reasons. One of his arguments was that he signed it under duress. Sony insisted that the agreement was valid and Mr. Riskie brought a motion for summary judgment.

At the motion, Mr. Riskie argued that he had been required to sign the contract “in order to continue the teleworking arrangement from Ottawa” even though he had already moved before actually signing the contract. On cross-examination, he admitted that had had the option of signing the contract and accepting its terms, resigning and looking for alternative employment, or returning to Toronto on a full-time basis. He admitted that he preferred to sign the contract and make every effort to demonstrate its value to Sony so as to convince Sony to extend it.

The court pointed out that there is a five-part list of criteria to determine whether or not an employment agreement was executed under duress.

Firstly, the court will consider whether the party protested at the time that the contract was entered into. In this case, the court found that while Mr. Riskie had protested numerous aspects of the proposed deal, he never protested that he was being placed under duress at the time that he actually signed it. He acknowledged that he had been given several weeks to think it over and the court concluded that this was not consistent with coercion or duress.

Secondly, the court will consider whether there is an effective alternative course open to the party alleging duress. In this case, Mr. Riskie certainly had the alternative of staying in Toronto and commuting frequently but he declined to select it.

Thirdly, the court will consider whether the party received independent legal advice. The court concluded that as a highly paid senior executive, Mr. Riskie could have sought such advice if he had chosen to do so. There was no time pressure applied to him to preclude him from seeking advice and he had the means, the time and the opportunity to do so.

Fourthly, the court will consider whether, after entering into the contract, the party took any steps to get out of it. In this case, no such steps were taken and there was no suggestion that Mr. Riskie did anything other than to perform his duties to the best of his ability.

Finally, the court will consider whether the party was placed under any illegitimate pressure. In this case, the court found that Mr. Riskie could have simply resumed his duties full time in Toronto had he chosen to do so. While his reasons could be readily understood, not having a preferred option available is not a test for duress. There must be an illegitimate application of coercive pressure in order to void a contract for duress. In this case, Sony had no obligation to accommodate the move to Ottawa and every right to propose terms on which it might do so. There was nothing wrong in Sony attaching conditions to its willingness to accommodate Mr. Riskie’s request.

As a result, there was no basis for concluding that the employment agreement was entered into under duress.

After disposing of Mr. Riskie’s other arguments, the motion for summary judgment was dismissed.

With increasing frequency, companies with employees of indefinite duration are turning to written employment contracts with those employees and asking them to execute them during the course of their employment. There a number of rules that have been established by the jurisprudence that must be followed for those contracts to be enforceable. This case provides useful clarification as to the circumstances under which such an agreement may be set aside for duress.

When Can A Former Employee Compete?

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In the recent case of Optilinx Systems Inc. v. Fiberco Solutions Inc., the Superior Court of Ontario provided a useful reminder as to the circumstances in which a former employee is entitled to compete with his former employer.

In this case, Mr. Foresta had been employed by Optilinx as the project manager of its fiber optic division. He was not an owner, officer or director of the company and he was not bound by any non-competition or non-solicitation agreement. He was not involved in management at a senior level. However, he was regarded by the company as a key employee and, in fact, he was its highest paid staff employee when he resigned in August 2014 after 12 years of employment.

The company’s customers were major Canadian telecommunications companies such as Bell Canada and Rogers. It did not have exclusive contracts with its customers and it competed for their business against other fiber optic cable companies. Mr. Foresta was the company’s main but not its exclusive salesperson with its customers, reporting directly to the company’s owner.

In the months before his departure, he indicated to other employees in confidence that he was planning to leave and start his own business that would compete with the company. He suggested to them that they would be welcome to join him in the new business and that they should seriously consider doing so because his departure would imperil the company’s business success.

In the summer of 2014, he incorporated his own company and obtained $300,000 in financing. He then resigned. Shortly afterwards, four other company employees resigned to join him.

After his departure, he re-entered the fiber optic cable business through his new company.

Optilinx’s case against Mr. Foresta was that he was no ordinary employee, but rather a key employee owing fiduciary duties to his employer. The company sought an injunction to stop Mr. Foresta from doing business with several of the company’s largest customers.

To the court, however, while Mr. Foresta may have been a very important and productive employee, and even the lynchpin to the company’s success, he was not an owner, director, shareholder or a member of management. His importance as an employee did not mean that he was a fiduciary. In this case, the company was unable to establish a sufficiently strong case that Mr. Foresta occupied the position of a fiduciary.

As the court noted, there is nothing to prevent an ordinary employee from terminating his employment, at which point that employee is free to compete with his former employer unless there exists a contract preventing him to do so. On the other hand, a fiduciary occupies a position of loyalty and trust and is not permitted to allow his own self-interest to conflict with those duties. However, even a fiduciary who terminates his employment is entitled to accept business from former clients, although a fiduciary may not directly solicit business from former clients. In this case, even if Mr. Foresta did have fiduciary responsibilities, there was no evidence that he had actively solicited business from the company’s customers.

The situation would have been different had there been evidence that Mr. Foresta had taken confidential information such as customer lists, or stolen trade secrets, from his employer. That type of conduct is unlawful and the court will step in, in those circumstances. However, as this case reminds us, where the departing employee is not a fiduciary, the rules are very different.

Wrongful Dismissal and Mitigation: Can a Fired Worker Start His Own Business?

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The recent case of Leeming v. IBM Canada Ltd. includes a useful review of the law relating to mitigation of damages in the context of wrongful dismissal. It provides some particularly useful insights into the issue that arises when the fired employee, unable to find comparable employment, starts his or her own business.

In this case, the plaintiff was wrongfully dismissed from IBM from her position as a Senior Managing Consultant. In that position, she had been responsible for various project management duties including project scheduling, tracking budgets and interfacing with clients to ensure deliverables were met.

After eight years of employment at IBM, IBM decided to eliminate her position and terminated her employment. At that time, she was 60 years old.

In the following four months, she applied for 20 positions in various industries and job types. She searched job search websites and spoke to recruiters. She tried to find jobs through outplacement counselling, by networking with friends and business contacts and through any leads that those people provided to her. She created a LinkedIn profile through which she was approached about potential job opportunities.

She had two job interviews but she received no offers.

When her efforts to find a new position failed, she decided to start her own business specializing in digital marketing solutions for small and medium-sized companies. Marketing was not an area in which she had either experience or training. She obtained a franchise with a franchisor in that industry but by the time her lawsuit reached trial over one year later, her business had not yet become profitable.

IBM took the position at trial that she had failed to mitigate and was therefore disentitled to damages for wrongful dismissal.

The court was satisfied that the plaintiff did not fail to mitigate. The judge found that she had made reasonable efforts to find a new job and ultimately that her decision to become her own employer by training herself for a new career as a franchisee, was reasonable. The judge pointed out that it was easy enough for IBM to say that she should have stayed in the labour market longer but in the judge’s opinion, she tested the market long enough to make a reasonable decision to retrain for a new career.

The judge referred to a previous Court of Appeal decision in which case the court had said that the fact that the early years of a worker’s self-employment did not live up to his monetary expectations does not mean that this was an unreasonable attempt to mitigate. A fired worker is entitled to consider his own long term interests when seeking another way to make a living. His attempts at mitigation cannot be considered unreasonable just because he fails to focus exclusively on his short term obligation to mitigate damages for the sake of his former employer.

The idea of starting one’s own business always raises difficult questions in the context of a former employer’s mitigation arguments. In this case, the plaintiff spent what the court considered to be a reasonable amount of time and made reasonable efforts without success. Presumably, her age had something to do with her inability to find another job. Nevertheless, the question of when it is safe for a fired worker to give up the job search and retrain for a new career will always be a tricky one, since the odds that the new career will pay dividends during the notice period are usually quite low.

The Latest on Employment Contracts that Require Employees to Give Notice of Termination

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The recent case of BlackBerry Limited v Marineau-Mes provides a useful insight into the often murky area of the obligations of an employee to provide notice of his intention to resign.

In this case, the employee was a Senior Vice President of BlackBerry Limited.

In the fall of 2013, he accepted a promotion to Executive Vice President in charge of about 3,000 employees. He signed an employment contract for his new position.

Among other things, the contract provided that he could resign at any time on six months’ prior written notice. The contract provided that during the notice period, he would continue to provide active service to the extent required by BlackBerry.

By the time he signed the contract in October 2013, he had already begun discussions with Apple Inc. about a new job. About a month after signing the contract, he had some discussions with BlackBerry’s newly appointed Chief Executive Officer which he did not find satisfactory, because the discussions included the notion that his role might ultimately be narrower in scope than originally contemplated.

One month later, in December 2013, Apple offered him a senior management position and he gave BlackBerry written notice of his resignation. He advised BlackBerry that he intended to join Apple in California in about two months.

This led to a dispute as to whether or not he was obliged to provide BlackBerry with six months’ notice of his resignation as required by the contract, thereby making himself available to assist with his transition out of the company for that period of time. BlackBerry brought an Application to the Court for an Order to that effect. The employee took the position that the contract was not valid and enforceable.

There is an abundance of case law around the question of reasonable notice of termination when an employer makes the decision to fire an employee. There is much less case law relating to the extent to which employees are obliged to give reasonable notice of resignation. That may be why BlackBerry insisted on a specific contractual term requiring six months’ notice in the event that this senior employee wished to resign.

The problem is that these concepts are not simply the opposite sides of the same coin. It is generally open to an employer that does not wish the terminated employee to actually work through his notice period, to provide the terminated employee with pay in lieu of reasonable notice. On the other hand, where the employee is resigning, the employer may well need the employee to continue to work through the notice period, or to at least make himself available so that there can be an orderly transition of that employee’s duties to a replacement. A payment of money by the resigning employee to the employer to take the place of that notice period simply won’t address the problem that the employer may be facing, particularly where the resigning employee is a member of senior management or has other specific knowledge or training that the replacement employee will not have.

In this case, the employee argued firstly that even if the contract was valid, he was free to leave during the notice period and BlackBerry’s remedy was an action for damages if any. The Court had no difficulty rejecting that argument.

The employee raised a number of other minor arguments but the other major point he tried to make was that the six month notice period was the equivalent of a non-competition covenant which was unreasonable and therefore unenforceable.

The Court did not accept that submission either. The Court found BlackBerry’s argument that it was necessary to have the employee available, and that the notice period was one of the tools allowing it to achieve that end, to be quite reasonable. Furthermore, given that the employee knew all along that he was expected to remain available to perform duties to BlackBerry during the notice period, and that these services would be necessary for his transition out of the company, the Court rejected the argument that the notice period was the equivalent of a non-competition clause. Finally and in any event, the Court observed that while the notice period did have some aspects of a non-competition agreement, it is the law in Ontario that reasonable competition clauses are enforceable. The Court found this clause to be eminently reasonable.

In the result, the Court found that BlackBerry was entitled to a declaration that the contract was binding and that the employee was required to provide six months’ prior written notice of resignation.

In my experience, employees sometimes seem to think that if they choose to resign, they will be able to do so without any particular regard for their obligation to provide reasonable notice. That may be true for some. However, where an employer is careful enough to require a specific notice period in an employment agreement, this case is a reminder that employees signing such employment agreements must take those clauses seriously.

Furthermore, for those perspective employers interested in hiring senior employees, it may well be prudent to question the perspective recruit as to any obligation that individual may have to provide reasonable notice of resignation to his or her former employer.