Handle with Care – Non-Competition Provision Results in Increased Notice Period

Previously printed in the CCH’s Focus on Canadian Employment and Equality Rights Newsletter.

Before incorporating a non-competition provision into an employee’s contract of employment or reminding a departing employee that a non-competition provision precludes the employee from competing and will be enforced against him or her, employers should carefully consider the value of proceeding in such a fashion and all of the ramifications.

Apart from the difficulties which employers commonly encounter when trying to enforce a restrictive covenant which precludes competition, the B.C. Supreme Court has recently reminded us of one additional risk. In Ostrow v. Abacus Management Corporation Mergers and Acquisitions, 2014 BCSC 938, the 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.

Significantly, the Court did not consider whether the non-competition provision was actually legally enforceable but instead focused on whether the employee reasonably believed that he was bound by the provision and accordingly hampered or impeded in his search for reasonably similar, alternate employment.

Background 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 1, 2011 to December 1, 2011.

Mr. Ostrow was dismissed from employment with Abacus with immediate effect. His employment was terminated without cause. At the time of dismissal, 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 Employment Standards Act, R.S.B.C. 1996, c. 113.

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

Mr. Ostrow became re-employed 16 months after his dismissal from employment. In his new employment, he was paid 30 percent less than what he had been paid at Abacus.

Mr. Ostrow sued Abacus for wrongful dismissal. Because the defendant company chose not to dispute liability (which was 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 Mr. Ostrow was entitled to “damages in lieu of notice in the amount of six months’ pay which include benefits, Canada Pension Plan contributions, and bonus.”

While there are other aspects of the Court’s decision which are interesting, the part of the decision which warrants special attention is the effect of the non-competition provision on the notice period to which Mr. Ostrow was entitled.

The Court began by highlighting that there is “a surprising lack of jurisprudence on the relationship between a non-competition clause in the employment contract and the length of the reasonable notice period.”

Notwithstanding the dearth of relevant legal authority, the Court observed that the limited number of cases on point were 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 went on to conclude that “the existence of the non-competition clause in Mr. Ostrow’s contract increase[d] the period of reasonable notice.” The Court rejected the defendant company’s submission to the effect that it did not seek to enforce the non-competition provision against Mr. Ostrow and had at no time in the past “taken legal action against an employee with regard to the violation of such a covenant.” The question, the Court ruled, was whether Mr. Ostrow had reasonably believed that he was bound by the restrictive covenant which prohibited competition. The Court concluded that he had and stated the following in this regard:

Upon his termination, Abacus gave Mr. Ostrow a formal letter which reminded him of the non-competition clause in the contract. He was also verbally reminded of that clause by Ms. Fong. It was reasonable at that point for Mr. Ostrow to believe that he was bound by the clause, regardless of whether Abacus had enforced such agreements in the past or would do so in Mr. Ostrow’s case …

The Court did not indicate specifically how much the notice period was increased in Mr. Ostrow’s case on account of the non-competition provision in his written contract of employment. It is, however, interesting to note that the length of the notice period to which he was found to be entitled exactly matches the temporal duration of the restrictive covenant which precluded competition.

It is also interesting to note that when it came to the issue of whether Mr. Ostrow had taken reasonable steps to mitigate the damage or loss flowing out of the termination of his employment (as he was legally obligated to do), the Court did not hold him to a particularly exacting standard. In the Court’s view, it was reasonable for Mr. Ostrow to “self-restrict his mitigation efforts” and take “more than the normal time to right himself” because of, among other things, “his belief that he was bound by a non-competition clause.”

Lessons for HR Practitioners

HR practitioners who work with employers have been handed yet another reason to handle non-competition provisions with the utmost care.

In light of the challenges frequently encountered when trying to enforce a restrictive covenant which precludes competition as well as the specific risk identified in Ostrow v. Abacus Management Corporation Mergers and Acquisitions, thoroughly consider whether it is necessary to incorporate a non-competition provision into an employee’s contract of employment in the first place. Moreover, and regardless of the actual legal enforceability of a non-competition provision, give careful thought to whether you will remind a departing employee that the non-competition provision precludes the employee from competing and will be enforced against him or her. As well, perhaps consider providing the departing employee with notice that there will be no attempt at all to enforce the non-competition provision against him or her following the termination of his or her employment.

Above all, if you have any question whatsoever with respect to a non-competition provision (or any other restrictive covenant for that matter), the desirability of incorporating such a provision into a contract of employment and the overall implications for your business and operations, give serious thought to contacting a reputable employment lawyer who can provide you with appropriate advice.