Employees Face Pricy Penalties After Moving To A Competitor
September 23, 2021
When someone quits their job, their next step is usually to start a new job they have already secured, or start looking for one. However, some employers might include clauses in employment contracts that limit someone from taking a similar job with a competitor. These are known as non-competition agreements and are usually put in place for people with senior positions or people who have portfolios of clients, such as insurance companies or investment banks. While these clauses are sometimes found to be unenforceable, they can also hold up when challenged in court. A recent decision from the Court of Queen’s Bench of Alberta serves as an example of the consequences that an employee may experience when not abiding by the terms of a non-competition clause.
Employees move portfolios to a competitor
The matter arose after two employees (“RW” and “KK”) of the employer, who was an insurance company, left their positions with the employer and took 40 clients with them.
Both employees had similar employment contracts which stipulated that
“For a period of 24 months after the date of termination of the Employee’s employment with (the employer), however caused, the Employee will not for any reason…contact, solicit, sell, serve, direct or receive business from any person, firm or corporation in the Province of Alberta, which was a client of (the employer) at any time during the period of the Employee’s employment with (the employer), unless in respect of any such client, the Employee shall pay to (the employer) an amount equal to 250% of the total of all commissions or other income in respect of Insurance policies or related products and services of such client charged by (the employer) for premium periods commencing in the 12 month period immediately preceding the renewal date of said policies, or 250% of all such commissions or other income charged by (the employer) for the las 12 month period during which (the employer) served that client, whichever is greater.”
In effect, the clause does not prohibit employees from working for a competitor, but it attaches a significant price to it. RW’s penalty would have been 250% of the commissions, while KK’s was 180%. The court noted that these figures were consistent with those found in the industry.
The court noted that the employees’ new employer was aware of the group of clients that came with them, was aware of the clause in their employment contracts, and benefitted from the clients coming over.
Can the non-competition clause hold up?
The court stated that in cases where an employee may be unaware of the entirety of an employer’s client portfolio. However, in this case, all of the clients who came over were the clients of the employees.
In addition, the court considered reasons why a non-competition clause might be deemed unenforceable. These reasons may be because a clause restrains trade, or prohibits employees from conducting business with former customers of clients. A clause may also be struck down if it impairs consumer choice, which was not the case here.
The court also went back to the fact that the terms of the clause are consistent with those in the industry, and is in place to protect the block of business
The employees were found liable for significant amounts, specifically $1,176,330 for RW and $870.484 for KK.
As a firm, our employment lawyers have over 130 years of litigation experience and have handled numerous disputes over contracts and other agreements. We offer our employer and employee clients insightful legal advice, along with personal service that is responsive to their needs.
If you have questions about a confidentiality or non-competition agreement, contact HMC Lawyers online or call 1-800-480-3534 to make an appointment. With offices in Calgary, we represent professionals in Calgary, throughout Alberta, and across Western Canada.