Non-competition provisions in employment contracts present challenges for employers at the best of times.
The BC Supreme Court reminded us in Ostrow vs. Abacus Management Corporation Mergers and Acquisitions, 2014 BCSC 938, of one additional challenge. The court ruled that a non-competition provision had the effect of increasing the notice period to which a wrongfully dismissed employee was entitled.
The court did not consider whether the non-competition provision was actually legally enforceable. Instead, it focused its analysis on whether the dismissed employee reasonably believed he was bound by the provision and restricted in his search for a comparable job.
Adam Ostrow worked for Abacus Management Corp. Mergers and Acquisitions for nine months until he was dismissed from employment without cause. He was provided with one week’s pay in lieu of notice. This is what was statutorily owed to him under the B.C. Employment Standards Act.
In a letter issued on dismissal, Ostrow was specifically reminded about the non-competition provision in his written employment contract. He was also cautioned by the human resources manager at Abacus that he was “restrict[ed]” for six months “from working for other employers.”
Ostrow became re-employed 16 months later in a lower-paying job.
Ostrow sued for wrongful dismissal. Abacus wisely chose not to dispute liability. The only issue before the court was the amount of damages to which Ostrow was entitled.
Ostrow was held to be entitled to wrongful dismissal damages equal to six months of pay.
Notwithstanding the dearth of jurisprudence on point, the court observed that the limited number of relevant cases (predominantly from Ontario but one appellate decision out of B.C.) were consistent in concluding that “a non-competition clause … is a factor which may increase the length of [a] reasonable notice period.”
The court then held that the non-competition provision in Ostrow’s contract increased the notice period to which he was entitled. The court rejected Abacus’ submission that it did not seek to enforce the non-competition provision and had at no previous time “taken legal action against an employee with regard to the violation of such a covenant.” The question, the court said, was whether Ostrow had reasonably believed he was bound by the non-competition provision. The court concluded he had. It highlighted the formal letter reminding Ostrow of the non-competition provision and the verbal caution from the HR manager.
The court did not indicate how much the notice period was increased because of the non-competition provision. It is interesting, however, that the length of the notice period found to be appropriate in Ostrow’s case exactly matches the temporal duration of the restrictive covenant.
On the issue of whether Ostrow had satisfied his legal duty and taken reasonable steps to mitigate the loss resulting from his dismissal, it is also interesting that the court did not hold him to a particularly exacting standard.
The court held it was reasonable for Ostrow to “self-restrict his mitigation efforts” and take “more than the normal time to right himself.” This was on account of factors including “his belief that he was bound by [the] non-competition clause.”
Employers now have another reason to approach non-competition provisions with the utmost care. They should carefully consider the following:
•Is it necessary to add a non-competition provision to an employment contract in the first place?
•Leaving aside whether the non-competition provision is actually legally enforceable, is it advisable to remind a departing employee about the non-competition provision in his or her contract?
•Is it worth providing the departing employee with notice that there will be no attempt at all to enforce the non-competition provision?
This is an abridged version of an article first published in the September 2014 edition of Wolters Kluwer CCH’s Focus on Canadian Employment and Equality Rights newsletter.
James D. Kondopulos (firstname.lastname@example.org) is a founding member and partner (practising through a law corporation) of Vancouver-based employment and labour law firm Roper Greyell LLP.