Taking Clients From Former Employers

A common issue when employees leave a company for a competitor or start their own business is whether they can take clients with them. Soliciting clients from one’s former organization can be highly irritating to the employer.

Fortunately for former employers, provisions in the employment contract can prohibit the solicitation of clients should the employee move on to another company at a later time. If there is no contractual provision in the agreement regarding the solicitation of clients, the employer can be at risk of losing its prized assets. However, the non-solicitation clauses should be as reasonable as possible, otherwise, they are vulnerable to be considered unenforceable by a court.

 Use Restrictive Covenants Clauses in the Employment Contract

While the courts seek to protect the employers right to its clients, departing employees are also protected in terms of maintaining their career. Employees holding non-managerial and who are not “key employees” crucial to your business are allowed to make their services available to former clients.

However, restrictive covenants could be drafted into the employment contract to show exactly what a departing employee can or cannot do. Our blog article, What You Should Know About Non-Solicitation and Non-Competition Clauses, fully discusses such restrictive covenants clauses in the employment context with their usage and enforceability.

Fiduciaries and Common Law Duty of Good Faith and Fidelity

Employees may be considered fiduciaries if they have considerable control and responsibility over the former employer. These types of employees have the ability to affect their former employer’s business because of the role they had with the former employer. They were likely entrusted with more important aspects of the organization that could be detrimental to the employer should the employee use the information or take the clients to another company. Simply, the departing employee has a responsibility to put the interests of the former employer of their own interests. This responsibility or strict obligation can last long after leaving their former employer due to the serious harm they could cause the organization.

Post-Employment Fiduciary Obligations

Fiduciaries obligations continue after employment has ended and do not cease merely because of resignation or dismissal by the employer. It is stated that fiduciary obligation was a larger more exacting duty than simply the duty to respect the former employer’s trade secrets and the confidentiality of its customer lists. While ordinary employees only have a duty to respect trade secrets and not property such as customer lists, the fiduciary has a duty not to direct solicit the former employer’s customers for a reasonable period of time. As a general rule, when it comes to former clients, a fiduciary must wait until they come to him or her of their own initiative. A breach of fiduciary obligation after termination of the employment relationship will be actionable even if the employer has not suffered damages

What is Considered a Misuse of Confidential Information?

Employees are prohibited from using confidential information from their employer, at their new place of work. A trade secret is an example of confidential information. For instance, an employee from soft drink company A cannot take the secret recipe to soft drink company B. This is stealing an employer’s confidential information. The recipe did not belong to the employee. It belonged to the employer.

Most employment contracts will have provisions regarding restrictions on using confidential information outside of the company. This restriction is considered to be indefinite.

How to Secure Your Business and Your Employee From the Legal Issue and Court

The first step an employer can take to secure their business is to ensure the relevant issues are dealt with in the employment contract. Employers will typically have provisions in the employment agreement that deals with the following:

  1. Employees competing with their employer;
  2. Soliciting clients from their employers; and
  3. Misusing the employers’ confidential information.

However, employers (and employees) should be aware of the limitations of each of the contractual provisions.

Provisions in the employment contract that deals with an employee competing with their employer are known as non-competition clauses. An employer may include this type of clause in the employment agreement. That being said, non-competition agreements are pre-emptively unenforceable in court. They are seen as a restriction of trade which is contrary to public policy. A non-competition agreement may be found to be enforceable only if the employer would be extremely vulnerable to competition from the employee (ex., If they are a fiduciary) and if it is properly limited in scope. This refers to what specific activities, the time period they cannot compete for, and the geographic scope of the clause. It is impossible to indefinitely prevent a former employee from competing.

Non-solicitation provisions are also common in employment agreements. These are important to include in the contract from the outset, especially if the employee does not owe a fiduciary duty to the employer. Similar to non-competition clauses, non-solicitation provisions are presumed to be unenforceable. However, it is easier to enforce a non-solicitation agreement based on the reasonableness in comparison to non-competitions.

Lastly, employment agreements will also commonly touch on the misuse of confidential information. These provisions will restrict the employee from using confidential information, like trade secrets, outside of the company. Unlike non-competition provisions, restrictions on the use of confidential information is indefinite.

If an employee breaches the terms of the agreement on the above issues, employers do have legal recourse in the form of an injunction. An injunction will require the employee stops what they are doing until the employer’s lawsuit goes through the various stages of litigation.

A successful injunction must satisfy the test:

  1. There is a serious issue to be tried;
  2. There is a threat of irreparable harm to the former employer if the prohibited activity continues;
  3. The balance of convenience favours the employer — which party will suffer the most harm from either the granting or refusing of the injunction.

It is important for employers to understand the limitations they can put on their employees who may leave the company at a later date. If an employer is unsure of how to secure their business from potential legal issues, please contact Ball Professional Corporation to receive the quality advice you need.

A Case in Point

 In the case of Computer Enhancement v J.C. Options, 2016 ONSC 452, two former employees were ordered to pay their employer $132,581 in damages for breach of contract and fiduciary duties. In this case, the employees resigned and began soliciting clients of the employer. The court held that both employees, one who was a junior salesperson and the other who was a “key employee” with fiduciary responsibilities breached their common law duty to not solicit clients of the employer.

Unless the employee is found to be a key employee with a fiduciary duty, solicitation may occur if there is no contractual clause limiting such action.  Ultimately the case reveals the importance of requiring salespersons to sign employment agreements with enforceable non-solicitation or non-competition clauses and shows the importance of keeping track of lost revenue when former employees have solicited your clients.

In determining whether an employee is a fiduciary, the court will analyze the employee’s position and go beyond mere job titles. This is a complex matter. It is strongly suggested that you should seek legal advice in this aspect. If you come across any legal issue in connection to the solicitation of clients from previous employers, Top Toronto employment lawyer Stacey Ball can help you explore your legal options. Please contact our office at 416-921-7997 extension 227.