Restrictions on restrictive covenants

In today’s competitive business environment, business owners are constantly looking for an edge over the competition. To obtain that edge...

by Doug Lester

Contributor

In today’s competitive business environment, business owners are constantly looking for an edge over the competition. To obtain that edge, they look for the most skilled employees in the work force, and at times they try to restrict the ability of key employees from going to work with competing employers.

Agreements like this are called “restrictive covenants” and are created to protect the employer’s interests against employees who generate goodwill with customers or clients, and then take that goodwill with them to their next job.

The law recognizes a restrictive covenant can be enforceable in Canada as long as it is not unduly restrictive or oppressive. What is unduly restrictive or oppressive has been commented upon by the courts on many occasions. A recent decision in Alberta may have implications for B.C. employees and employers alike.

In a case called Globex Foreign Exchange Corporation v.  Kelcher, the employer sought to enforce its restrictive covenant upon its former employee.  However, Globex had fired its employee, without just cause, giving rise to a “wrongful dismissal.”

The judge from the Alberta Court of Appeal said wrongful termination will render a restrictive covenant unenforceable, and “there are valid reasons for excusing a wrongfully dismissed employee from compliance with restrictive covenants. To hold otherwise would be to reward employers for mistreating their employees. For example, an employer could hire a potential competitor, impose a restrictive covenant on the employee, then wrongfully dismiss her a short time later and take advantage of the restrictive covenant. This would be a highly effective, but manifestly unfair way of reducing competition.”

Another aspect of the Globex case was that it had forced some employees to sign their restrictive covenants during the course of their employment, rather than when they were first hired.

The court found that these employees were effectively told to either sign the agreements or resign. Even though at least one of those employees continued to work at Globex for some time after he signed the covenant, the court concluded that this was not enough to make the agreement valid. The court explained that the promise to continue someone’s employment does not, by itself, amount to justification for such an agreement, because the employer is already required to continue the employment until proper grounds exist for termination.

The reasoning behind the Globex decision is detailed and well-reasoned and, although it is not binding on courts in B.C., decisions in cases from other provinces are often followed in this province.

Before entering into a restrictive covenant arrangement, employers and employees should consult with an employment lawyer to make sure their interests are protected.

Doug Lester is a partner with RDM Lawyers.

legalease@abbynews.com

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