Valid Employment Contracts
“Kitchen sink” approach often fails
This is the tale of two recent appeal cases, which together confirm my “Kitchen Sink” theory on employment contracts. That is, employers often bargain for excessive protection, no matter how junior or administrative the employee. However, in seeking such protection, they sometimes get none at all.
In 1992, Tom Mason signed an employment contract with his employer Chem-Trend Ltd., which contained a non-compete clause preventing him from dealing with its customers for one year after he left the company. Mason did not hear about the contract again until 17 years later when he was suddenly fired.
When Mason learned that companies were hesitant to offer him jobs, fearful that they could be sued due to his non-compete clause, he went to court to ask that it be declared invalid. An Ontario judge concluded that the clause was clear and that Mason must be bound by what he signed. Employers collectively sighed in relief since most court cases strike down these clauses based on the courts’ interpretation of what is fair, and not what the contract actually states. Mason appealed and that is exactly what the Ontario Court of Appeal found. Chem-Trend’s contract was drafted in a manner that was unfair to Mason and consequently, it was invalid.
Similarly, the Alberta Court of Appeal recently refused to enforce the non-compete clauses in the employment contracts of three traders at the foreign exchange firm Globex. What is important about this case is not the fact that the contracts were struck down but the Court’s ruling that an employee who is wrongfully dismissed should be relieved from complying with post-employment restrictions, such as a non-compete or non-solicit clause regardless of how they are drafted. If this decision takes root across Canada, employers will be forced to pay fair severance to fired employees or risk having their employment contracts thrown away.
Most of the uncertainty around these clauses can be avoided by following a few simple rules:
- If a non-solicitation clause can satisfy an employer’s legitimate concerns, a non-compete will almost never be enforced, except possibly for the most senior employees.
- The longer the contract is set to apply post-employment, the greater the chances a court will declare it invalid.
- Courts will not rewrite ineffectual contracts by imposing valid terms. Employers are usually given only one chance to draft contracts correctly.
Author: Daniel Lublin