Don't Let A Restrictive Covenant Bite You In The Assets

The challenges of enforcing non-competition and non-solicitation clauses in employment contracts are well known. It is less renowned that such clauses may increase the reasonable notice period owed by an employer to a dismissed employee, as we were reminded in a recent decision by the Supreme Court of British Columbia: Ostrow v Abacus Management Corporation Mergers and Acquisitions.

The defendant, a private equity company, employed Mr. Ostrow as a senior manager to provide tax advice. There was a termination clause in his employment contract that allowed for "reasonable notice according to the law or pay in lieu of notice in accordance with the law". The contract also included a six month non-competition clause.

The defendant terminated the plaintiff after nine months and provided him with one weeks' pay in lieu of notice, being the minimum notice required under the Employment Standards Act. The termination letter reminded the plaintiff of the non-competition clause.

The Court held that the termination clause did not permit the employer to limit notice or pay in lieu to the statutory minimum. Rather, the termination clause was interpreted to mean that the employee was owed reasonable notice at common law. In addition to the traditional factors at common law which determine the reasonable notice period (i.e. age, length of service, character of employment, and availability of similar employment), the Court considered the existence of the non-competition clause. The defendant employer insisted that it had not sought to enforce the non-competition clause. However, the plaintiff was found to have a reasonably held belief that the employer would seek to enforce it.

The Court decided that the presence of the non-competition clause in the employment contract increased the reasonable notice owed to the employee upon termination of his employment without cause, regardless of whether the clause was ultimately relied on by the employer or even enforceable.

The Court awarded Mr. Ostrow, a 42 year old who had been employed for nine months, six months of notice.

Implications for Employers

As a general rule, absent a termination clause in an employment contract, the employee will be entitled to a generous and uncertain reasonable notice period in accordance with the common law. In the Ostrow case, although the employment contract contained a termination clause, it did not expressly limit the notice period to anything less than the common law. As a result, the Court was left to determine the reasonable notice period and consider relevant factors, including the restrictive covenant.

Employers should carefully consider the necessity and enforceability of restrictive covenants in their contracts, the relationship such restrictions may have with the termination obligations, and how to address their existence at the time of a termination.

Note: This a reprint of an article by Bull, Housser & Tupper LLP.