Taking Clients From Former Employers
It is common for employers to restrict their employees’ ability to work for a competitor or solicit their clients once the employment relationship breaks down. In this blog, we illustrate a few key points on how to restrict a departing employee from taking clients from business.
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 who have significant responsibility and are “key employees” may be considered fiduciaries and as such, are under a strict duty to act solely in the best interests of their employer, even when exiting the company. Even if there is no contract, these employees cannot actively solicit clients of former employers. There exists at common law a duty of good faith and fidelity that protects the confidential information of organizations that may be used by competing businesses when employees switch between companies.
a. 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
b. 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.