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Contract Requiring Ex-Employee to Compensate Former Employer for Competing Ruled Enforceable in British Columbia

A recent decision of the B.C. Court of Appeal has endorsed a novel approach to post-employment competition by upholding an employment contract whereby the employee was required to compensate the employer if she competed soon after her employment ended. In Rhebergen v. Creston Veterinary Clinic Ltd., 2014 BCCA 97, a newly licensed veterinarian signed a three-year employment contract with an established veterinarian clinic in a rural community. Under the contract, the veterinarian was required to pay her employer a set amount if she set up a practice in the same area within three years of the employment contract being terminated. The veterinarian left the clinic after fourteen months and soon established a mobile veterinary practice in the area. The veterinarian went to court to have the payment clause declared unenforceable.

The Court recognized that there were two approaches in establishing whether such a clause was a restraint of trade, either a “functional” approach, which asks whether the clause attempts to, or effectively does, restrain trade, or a “formalist” approach, in which the clause must be structured as a prohibition against competition, which does not include “mere disincentives”. The formalist approach is more commonly used in Ontario, but the B.C. Court of Appeal adopted the functional approach in its analysis, and concluded that the clause was, in fact, a restraint of trade.

Notwithstanding that the clause was found to be a restraint of trade, the Court held that the clause was not a penalty because it reasonably compensated the employer for the costs incurred in training the new veterinarian. The Court split on whether the clause was ambiguous and therefore unenforceable. A non-competition clause is ambiguous if it is not clear as to activity, time or geography. The majority of the Court concluded that there was only one reasonable interpretation to the clause and it was not ambiguous. The clause was therefore enforceable by the employer, and the veterinarian was required to pay the amounts under the contract to her former employer as a result of her competition.

This case demonstrates the continually evolving nature of post-employment covenants, and the fact that courts will give employers some latitude to develop contractual “tools” to provide protection (or at least give financial compensation) in the event a former employee engages in competition soon after employment. The fact that the Court of Appeal was not unanimous demonstrates, however, that this is a complex area requiring careful drafting of contractual terms.

A copy of the B.C. Court of Appeal decision can be found here: http://www.courts.gov.bc.ca/jdb-txt/CA/14/00/2014BCCA0097.htm

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Contract Requiring Ex-Employee to Compensate Former Employer for Competing Ruled Enforceable in British Columbia

Terminated Employee Entitled to Profit Sharing Bonus Declared After Termination but During Employment Standards Notice Period

Employers often assert that a terminated employee is not entitled to a bonus for the termination year. A decision of an Ontario court may put a small qualification on that assertion. Employers should review their bonus policies in light of this decision.

The employer terminated the employee’s employment on May 25, 2010 on a without-cause basis. On June 18, 2010 – within the employee’s four-week Employment Standards Act notice period – the employer announced its profit sharing bonus for the recently-ended fiscal year and paid it out. The employer did not pay that bonus to the employee. The employee had been paid the bonus for her three previous years of employment. The bonus was a “very significant financial part of her overall compensation.”

Mr. Justice Ricchetti of the Ontario Superior Court of Justice held that section 61(1)(a) of the Employment Standards Act “permits the employer to terminate without notice but only if the employee receives what the employee would otherwise been entitled to receive from the employer under the terms and conditions of employment during the statutory notice.”

The judge held that under the employer’s bonus plan and practices, the decision as to whether to award profit sharing at all may have been discretionary, but once the bonus had been declared, the employer had no discretion to exclude a particular employee from entitlement. As such, all employees who were employed on June 18, 2010 were entitled to the profit sharing bonus. Because that date was within the employee’s four-week Employment Standards Act notice period, she was deemed to be “employed” at that time, and was thus entitled to the profit sharing bonus payment. An employer memo, issued a few months earlier, to the effect that only “active” employees were entitled to the bonus, did not override the statutory obligation to pay the bonus to the employee.

Sandhu v. Solutions 2 go Inc., 2012 ONSC 2073 (CanLII)

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Terminated Employee Entitled to Profit Sharing Bonus Declared After Termination but During Employment Standards Notice Period

Executive Entitled to Bonus Despite Breach of Fiduciary Duty

The Ontario Court of Appeal has recently restored an arbitrator’s decision granting a terminated executive his bonus despite his misappropriation of the employer’s money and resources during the period in which the bonus was earned.

Leonard Rossetto was the Vice President of a division of Mady Development Corp. (“Mady”).  Between September and November 2007, Rossetto diverted Mady’s labour and materials and used Mady’s funds to renovate his house.  Mady discovered the wrongdoing and terminated his employment in December 2008.  Mady subsequently sued Rossetto for damages for conversion, breach of employment contract, unjust enrichment, and breach of fiduciary duty.  Rossetto counterclaimed in respect of bonuses for 2007 and 2008 equal to 30% of Mady’s profits after overhead. 

The parties submitted the dispute to arbitration where Mady was awarded $546,452 for breach of fiduciary duty and for delays to one of its projects resulting from Rossetto’s breach.  The arbitrator also awarded Rossetto $364,661.33 in satisfaction of unpaid bonuses for 2007 and 2008.  The arbitrator held that the bonuses were an integral part of Rossetto’s compensation and that a dishonest employee is still entitled to be paid for the work that he has done.

Mady appealed the arbitrator’s award of the bonus to the Ontario Superior Court of Justice.  Justice Allen overturned the bonus award on the basis that a fiduciary is not entitled to compensation during the period of wrongdoing.

Rossetto appealed the decision to the Ontario Court of Appeal, which reinstated the arbitrator’s award of the bonus.  Justice Hoy held that errant fiduciaries do not forfeit their entitlement to bonus compensation in all situations.  A fiduciary’s entitlement to a bonus depends on the particular circumstances of the case.  There is a distinction between a principal-agent and employer-employee relationship.  While a principal will not be required to pay an agent commission for transactions that are in breach of a fiduciary duty, an employer is not free to withhold payment of wages due for past performance, even where the past performance may have involved a time when the employee was acting in breach of his fiduciary duty.  In this case, the bonus was significant and non-discretionary – Rossetto was as entitled to the bonus as he was to his salary for the period worked.

Although there may be some situations in which employees in a fiduciary relationship are disentitled to a bonus due to a breach in their duty, employers should be aware that the employee’s breach will not necessarily preclude entitlement to a bonus.

 Mady Development Corp. v. Rossetto: http://canlii.ca/en/on/onca/doc/2012/2012onca31/2012onca31.html

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Executive Entitled to Bonus Despite Breach of Fiduciary Duty