Wrongful Dismissals and Restrictive Covenants: The Cross Roads of Theory and Practice

Employers sometimes require their employees to sign restrictive covenants, prohibiting competition or solicitation of clients after the termination of employment. Such restraints can make it difficult for employees to secure alternative work. The question often arises: How do restrictive covenants affect an employee’s entitlement to notice of termination? Recent case law from Alberta and Ontario confirms the presence of non-competition and non-solicitation covenants sometimes justifies lengthened notice periods, even if the covenants eventually prove unenforceable.

It is well-established that restrictive covenants in an employment contract can result in longer notice periods (Dimmer v. MMV Financial Inc., 2012 ONSC 7257 at para 99; Murrell v. Burns International Security Services Ltd., 1997 CanLII 1287 (Ont CA)). According to Holland v. Hostopia.com Inc., 2015 ONCA 762, this is because they make it more difficult for the employee to find comparable employment. Holland also makes clear that a longer notice period is not automatic. If the covenant does not affect the wrongfully dismissed employee’s ability to get new work, it will likely not affect the reasonable notice period.

A recent Alberta case introduces something of a puzzle. In Specialized Property Evaluation Control Services Ltd v. Les Evaluations Marc Bourret Appraisals Inc., 2016 ABQB 85 at para 25, the Court confirmed that a wrongfully dismissed employee will not be bound by negative covenants.

Wrongful dismissal repudiates the employment agreement and terminates the contract, thereby discharging parties from future obligations[.] … [A]n employer who wrongfully terminates a contract of employment should not be able to capitalize on its failure to give notice or damages in lieu of notice by enforcing prospective obligations against an innocent employee. Wrongfully dismissed employees are excused from compliance with restrictive covenants.

This raises the question: If the wrongfully dismissed employee is not bound by negative covenants and is thus not disadvantaged in her search for alternative employment, should the notice period be affected at all by the presence of such covenants?

Employers may be tempted to suggest, based on Specialized Property Evaluation Control Services Ltd, that notice periods for wrongful dismissal should never be lengthened due to the existence of a non-competition or non-solicitation clause. That would be a mistake. Negative covenants can affect an employee even if they prove, in retrospect, unenforceable. Whether a given dismissal was wrongful is not always clear prior to the matter being adjudicated. For that reason, an employee dismissed without notice may feel he cannot risk acting contrary to a restrictive covenant, even though he believes the dismissal was without cause. If a court disagrees, he could be liable for damages for breach of contract. (For similar reasoning, see Ryan v. Laidlaw Transportation Ltd., 1995 CanLII 7020 (Ont CA)).

How do we determine if a restrictive covenant will affect the notice period? The underlying issue is whether the covenant inhibited the search for alternative employment. Thus, if the employer takes a position that the covenant is enforceable and the employee reasonably limits her job search accordingly, that could justify a lengthened notice period, even if at trial the negative covenant is found unenforceable. On the other hand, if the employer clearly communicates from the outset that it will not enforce the restrictive covenant, then it can argue the notice period should be unaffected.

Whether a non-competition or non-solicitation clause justifies a longer notice period will depend on the circumstances of each case. As often in law, there are no hard and fast rules; fact sensitive judgment is the only reliable guide.

Disclaimer: This blog does not provide legal advice and should not be relied on as such advice. The articles here provide general information only. They cannot take the place of good counsel tailored to your situation. Articles are not updated after publication and may become outdated with changes in jurisprudence or legislation.

Matthew Tomm Law provides legal services in Calgary, Alberta, focusing on employment law and civil litigation.

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