Departing Canadian Employees: Non-Solicit Clauses Still Can Bite
The modern world of work involves employees now more commonly moving from one organization to another. With this increasing mobility, many Canadian employers have incorrectly assumed that they have few legal options available to address misconduct by departing employees. Concerns in this area are compounded by the challenges associated with enforcing non-compete provisions.
A recent decision from the Alberta Court of King’s Bench provides a wake up call to departing employees, and offers businesses some hope that properly drafted non-solicitation provisions can and will be enforced to address improper conduct.
In Catch Engineering Partnership v Mai, 2023 ABKB 279, the former employer Catch sued its departed employee Binh Mai after he resigned and immediately began working for the same client where he had been assigned throughout his employment. The decision of Justice R.W. Armstrong awarded the company more than $100,000 in damages based on Mr. Mai’s actions, which included lying to his employer, and knowingly breaching the non-solicitation provisions in his Catch employment contract.
Catch is a firm which provides engineering services to third party clients, and has about 60 employees. Mr. Mai began working for the company in February 2019, and his terms of employment included clear wording which prevented him from encouraging corporate clients from hiring him directly. In the Court’s decision, the judge noted that the process leading to signing the employment agreement included a period of salary negotiation, all of which made it clear that, in his capacity as a candidate, Mr. Mai had reviewed and knew what he was signing.
A key client of Catch was Canadian Natural Resources Limited (CNRL). Catch had worked for CNRL since 2012, and by the time of Mr. Mai’s departure from Catch in December 2019, CNRL accounted for between 10-20% of Catch’s revenues in any particular year. One reason for this was that CNRL had at some point been subject to an employee hiring freeze, which they were able to work around through the engagement of contractors, including those sourced via Catch.
Immediately upon starting his employment with Catch, Mr. Mai was assigned to work with CNRL in a specialized engineering position. The arrangement involved Catch paying Mr. Mai an annual salary of $100,000, and his time spent working for was billed out to CNRL at $120/hour.
Towards the end of 2019, Mr. Mai told his supervisor at Catch that he wished to re-negotiate his work arrangements. His requests included seeking to be paid at an hourly rate of $65/hour. This was rejected, but Catch was prepared to pay him $60/hour and confirmed that. The very next day, Mr. Mai resigned his employment, claiming that his motivation was the “difference we had during negotiations.”
What ultimately emerged in the legal case is that all of this was a manufactured controversy, and Mr. Mai’s intent all along had been to find a path to working for CNRL on more favourable terms. This effort included what the Court found to be lying to Catch (about whether he had been communicating with CNRL), and knowingly breaching the non-solicitation provisions while employed and being paid by Catch.
The Court’s decision offers a clear and compelling analysis about the circumstances when restrictive covenants, and non-solicitation provisions in particular, will be enforced. While the general rule is that any contract provision which limits an individual’s right to engage in certain contact is unenforceable, there is such a thing as a valid non-solicitation clause under Canadian law. The key lens which will apply is the reasonableness of the provision, with a close focus on the clause in issue and the specific circumstances. In determining whether or not to enforce a clause, the onus will be on the employer to show that the relevant provision protects the organization’s legitimate business interests.
Catch succeeded in its claim for damages against Mr. Mai because it was able to show that there was a clear clause which was confined to addressing specific conduct. In particular, the clause involved prohibitions against diverting business away from Catch to the detriment of the company which was paying the individual who was subject to the restriction. The business model of a staffing agency such as Catch involves “owning” the relationship between contractors such as Mr. Mai and clients such as CNRL. It is entirely legitimate for a company which has spent many years developing and servicing a client relationship to have restrictions in place which prevent contractors from sidestepping the employer who is paying them.
One very important point in the Court’s analysis is that Catch did overreach in its contract provisions, and there was no contract wording or efforts which would have prevented Mr. Mai from working as an engineer (or even doing the specific specialized work he did for CNRL) for any other clients. The only limit was on the ability to take steps to encourage Catch clients to essentially fire Catch and either hire the contractor directly, or do so through another agency.
The Court awarded Catch $112,000 in damages, which it said Mr. Mai owed based on his breaches of his legal obligations to Catch. The damages were determined based on the amount of lost profit which Catch was reasonably expected to have received during the three years following Mr. Mai’s abrupt departure. The Court awarded damages based on what it found to be actions where Mr. Mai “engaged in a calculated course of action designed to benefit himself at the expenses of his employer.” These actions all occurred while he was still employed and being paid by Catch.
Takeaways for Employers
This decision is breath of fresh air for Canadian businesses, who have heard all too frequently lately that “employment contracts are not worth the paper they are written on.” While each agreement and its terms need to be reviewed on a case-by-case basis, there is such a thing as an enforceable non-solicitation provision. Employees who knowingly lie to the employer, especially about their own efforts to divert business away from the company which is paying them, may face substantial consequences. Even if every organization does not confront situations which are egregious as this, it is very helpful to know that Canada’s legal system can and will call former employees to account. This point alone will hopefully give employees a strong reason to pause before they act to the detriment of their employer.