Non-solicitation clauses are a form of a restrictive covenant that is “prima facie void as being contrary to public policy.” They are intended to prohibit employees from soliciting clients or other workers from their former employer after they leave the employer’s company. Courts may uphold these clauses if they are reasonable in terms of duration, scope, and geographical restrictions, but enforcing them can be challenging, given the high threshold. Therefore, it is important for employers to maintain well-drafted employment contracts.
A recent decision from the Court of King’s Bench of Alberta illustrates the difficulties that can arise when an employer seeks to enforce a non-solicitation clause and the potential consequences employees may face if they fail to abide by such covenants.
Employee signs employment contract containing non-solicitation clause
In the recent case of Catch Engineering Partnership v. Mai, the defendant and former employee (the “employee”) signed an employment contract with the plaintiff employer (“Catch”) on February 21, 2019. He also signed a Confidentiality Agreement with Catch that included a non-solicitation clause which stated that for a period of 12 months from the employee’s termination of employment, he shall not:
“(a) intentionally act in any manner that is detrimental to the relations between CEP and CEP’s clients, suppliers, contractors, employees or others; and
(b) Directly or indirectly contact or solicit any customers of CEP or any of its subsidiaries or affiliates with whom he or she has dealt during the twelve (12) months prior to his or her termination, for the purpose of inviting, encouraging or requesting any CEP customer to transfer from CEP to the Employee or the Employee’s new employer, or to otherwise discontinue its patronage and business relationship with CEP”
Further, for a period of 24 months from the date of termination of employment, the employment contract stated that the employee shall not:
“(c) solicit, induce, recruit or encourage any of CEP’s employees or contractors that existed before or after entering into this Agreement.”
Employee provides resignation to employer; seeks employment with client through new agency
The employee was assigned to provide engineering services to Catch’s client, Canadian Natural Resources Limited (“CNRL”). He provided these services to CNRL on behalf of Catch from February 2019 to January 2020. In December 2019, the employee approached the Vice President of Engineering at Catch with a plan to switch from a salaried employee to an independent contractor, as he believed he could earn more money by doing so.
On December 16, 2019, the parties agreed that the employee would be compensated at $60 per hour as an independent contractor. However, on December 17, 2019, the employee submitted his resignation letter to Catch via email, indicating that his final day with Catch would be January 3, 2020. Three minutes after sending his resignation letter, and while still employed by Catch, the employee emailed his supervisor at CNRL seeking employment with CNRL as an independent contractor through a different agency.
Employer claims employee breached non-solicitation clause
The employee obtained a new position with a different technical services company on December 19, 2019, although he remained working with the employer until January 3, 2020. The employee commenced his new role on January 6, 2020, and was assigned to CNRL to provide the same engineering services he had previously provided through Catch. CNRL also ended its engagement with Catch.
Catch commenced a claim against the former employee claiming, among other things, that the employee breached the non-solicitation clause. The key issue before the Court was to determine whether the non-solicitation clause in the employment agreement between the employee and Catch was enforceable.
What is the non-solicitation clause enforceable?
The Court noted that to be enforceable, a restrictive covenant, such as a non-solicitation clause, must be:
- narrowly focused on protecting a legitimate business interest;
- clear and unambiguous; and
- considering all the circumstances, it must be fair and reasonable.
The Court found that the clause was enforceable based on the five reasons below.
Reasonably protected a legitimate business interest
In its analysis, the Court found that the non-solicitation covenant contained in the Confidentiality Agreement was reasonable and, therefore, enforceable. The Court highlighted that Catch had a legitimate business interest, namely its business model, to protect. Catch provides skilled technical services to clients like CNRL, with whom it spends time and resources to develop and maintain strong relationships. When Catch assigned an employee to a client, those employees became embedded in that client’s business. Therefore, the business would not succeed if employees used the introductions initiated by Catch to solicit such clients after leaving the company.
Clear and unambiguous
The Court also found that the non-solicitation clause was narrowly focused on only protecting Catch’s legitimate business interests. It did not interfere with employees’ ability to draw from their skills and experience in the job market. Further, not every employee at Catch was subject to a non-solicitation clause. The clause only prohibited the employee from contacting a client of Catch to invite them to transfer from Catch to a new agency.
Geographic restriction not required
The employee agreed that the non-solicitation clause was not enforceable due to its failure to include a geographic limitation. However, the Court found this to be an overly restrictive interpretation of the reasonableness of such a covenant. The Court found that the non-solicitation clause only prevented the employee from soliciting the single client he had provided services for at Catch, which was reasonable.
No power imbalance during employment negotiations
The Court found no power imbalance while negotiating the employment relationship between the employee and Catch. When the employee attended Catch’s offices to sign the employment contract, he knew that Catch required his assistance to fulfill CNRL’s request. He used this information to negotiate a higher salary, given Catch’s vulnerable position, despite already agreeing to previously proposed terms of employment.
Did the employee breach the non-solicitation clause?
The Court found that the employee’s emails to his supervisor at CNRL constituted a clear and unequivocal invitation for the company to terminate its agreement with Catch and contract with a new company for the same services. Therefore, this resulted in a breach of the non-solicitation clause.
Court orders employee to pay substantial damages to former employer following breach
The Court determined that had the employee not solicited CNRL, they would have continued their engagement with Catch. The Court then turned its attention to the calculation of damages.
After considering the evidence, the Court estimated that Catch lost $112,320 in profit under CNRL’s contract between 2020-2022. This total amount represented Catch’s anticipated revenue, less the employee’s salary, taxes, benefits and overhead. The Court also applied a discount of 25% in the year 2021 and 50% in 2022 to consider unknown contingencies. Ultimately, the Court ordered damages to the employer for $112,320 plus pre-judgment interest.
This decision is good news for employers wishing to implement a non-solicitation covenant in their employment contracts. The Court’s analysis, in this case, is also helpful in illustrating the importance of having a properly drafted employment agreement, as the non-solicitation clause will be held to a high level of scrutiny to be deemed enforceable.
The Employment Lawyers at DBH Law in Calgary Provide Advice on Non-Solicitation Clauses in Employment Contracts
The skilled employment lawyers at DBH Law have advised employers and employees on a variety of employment law disputes for over 25 years. An employment agreement can be a crucial document if a dispute occurs during the employment relationship. It is also important to ensure that all contracts, particularly non-solicitation clauses, are well-drafted in the event of a dispute upon the termination of the relationship. To speak with one of our employment lawyers regarding your employment agreement needs, contact us online or by phone at 403-252-9937.