Jan 12, 2024  By John Hyde

Red Flags for HR Professionals and When to Seek Legal Advice Part IV

One of the most important skills that effective HR professionals possess is the ability to recognize when to seek legal advice before taking steps which could create or substantially increase liability.

This article is the fourth installment in our series aimed at helping HR professionals recognize when they should seek legal advice. Below are more examples of situations that warrant seeking specific legal advice, to avoid common pitfalls, minimize exposures, and safeguard your organization’s reputation. 

1. Former Employee Soliciting Clients

One red flag situation is where an employer discovers that an employee is soliciting its clients in order to provide them with competitive products/services, or in an effort to otherwise have them cease doing business with the employer.

It is crucial to seek prompt legal advice in such circumstances because: (i) it is necessary to act quickly in order to minimize the loss of existing clients and damage to the business; (ii) in many cases, the employer is legally entitled to have the former employee stop soliciting clients, but it depends on the circumstances; (iii) only a competent employment lawyer can determine whether an employer is legally entitled to require a former employee to stop soliciting their clients in a particular case; and (iv) regardless, a well-drafted cease and desist letter from a law firm will typically persuade former employees to stop soliciting their former employer’s clients.

Notably, there can be multiple bases for an employer to be legally entitled to require a former employee to not solicit its clients, including contractual non-solicitation clauses and common law rights pertaining to confidential information. Where the employee signed a written employment contract containing a non-solicitation clause prohibiting them from soliciting the employer’s clients following the cessation of their employment, then the employer can rely on the clause in demanding that the employee cease and desist from any further solicitation.

However, the courts scrutinize non-solicitation clauses very closely and, where the clause is broader than is reasonably necessary to protect the employer’s legitimate business interests, it may be legally unenforceable. In particular, a non-solicitation clause is unenforceable where it is ambiguous and/or unreasonably broad in terms of: (i) the length of time that it applies; (ii) the scope of the activities which are prohibited by the clause (e.g., whether the clause prohibits solicitation for any purposes versus solicitation for providing competitive products/services); and/or (iii) the clients to which it applies (e.g., any of the employer’s clients versus clients with whom the former employee dealt with on behalf of the employer in the previous year). Ultimately, determining whether a particular non-solicitation clause is likely to be legally enforceable is a relatively complex determination which can only be made by a competent employment lawyer. Nonetheless, even where a non-solicitation clause is unenforceable, the employer can often still rely on it in demanding that the former employee stop soliciting their clients, as an employee will likely not know that the clause may be unenforceable.

Moreover, even where there is no non-solicitation clause in an employment contract, employers can still be entitled to have the employee stop soliciting their clients under the common law where the employee is using confidential information belonging to the employer. This is because employees are generally prohibited from using confidential information belonging to their former employer, and employers are entitled to insist that their confidential information not be misused. Thus, where there is reason to believe that the former employee has retained customer lists or other confidential information belonging to the employer and they are using it to solicit the employer’s clients, then the employer may have some legal recourse at common law.

Finally, it is important to note that it is sometimes necessary for employers to address unlawful solicitation of clients in the courts by seeking an injunction or suing for damages. An injunction is effectively a restraining order whereby a court orders someone to not do something. There are different forms of injunctions, but they are typically difficult to get because an employer must generally prove that they will suffer “irreparable harm” without an injunction. Nonetheless, they can be an incredibly valuable tool to address unlawful solicitation by a former employee. Further, where an employer has lost clients, contracts, or suffered other losses due to a former employee unlawfully soliciting their clients, the employer can be entitled to sue the former employee for damages equal to the loss that they suffered.

Thus, employers would be well advised to immediately seek specific legal advice if they become aware that a former employee is soliciting their clients.

2. Employment Contracts Which Have Not Been Reviewed Recently for Legal Enforceability

Another high-risk situation is where an employer has not had its employment contracts reviewed for more than a year, as this creates serious risk that changes in the law over time have rendered the termination clauses in the contracts legally unenforceable.

This has serious implications for employers because an enforceable termination clause can dramatically reduce an employer’s liability when it becomes necessary to end an employment relationship. For example, in the case of a long-service employee, an enforceable termination clause can mean the difference between the employee being entitled to only 8 weeks of pay in lieu of notice or 24 months of pay in lieu of notice (or even more).

It is crucial for employers to have their employment contracts reviewed on an annual basis, because the law regarding when a termination clause will be legally enforceable is always changing, and there are sometimes dramatic changes in this area of law resulting from major court decisions.

For example, in 2020, the Ontario Court of Appeal (the “ONCA”) released its landmark decision in Waksdale v. Swegon North America Inc., which effectively invalidated most of the termination clauses in the province. For decades, termination clauses in Ontario generally included a clause which stated that the employee would not be entitled to anything if there was cause for their dismissal. However, the ONCA held in Waksdale that these types of clauses potentially violate the Employment Standards Act, 2000, because there is a different standard for when employees are not entitled to notice or pay in lieu of notice under the Act—that is, where the employee has engaged in willful misconduct or neglect of duty. As a result, the ONCA held that these types of “for cause” clauses were legally unenforceable, and that the inclusion of one of these clauses in a contract also invalidated all other termination clauses contained within it. This effectively rendered most termination clauses in the province legally unenforceable and dramatically increased most Ontario employers’ potential liability. That said, many employers have since adapted to this change by rolling out updated employment contracts containing legally enforceable termination clauses, such that their termination-related liability is minimized once again. On the other hand, employers who have not had their employment contacts reviewed by a competent employment lawyer recently may be in for a very unwelcome surprise when they face a wrongful dismissal claim and they do not have an enforceable termination clause to rely on in order to limit their liability.

Accordingly, employers who have not had their employment contracts reviewed in recent years for legal enforceability should do so, as soon as possible.

The Bottom Line

Please do not hesitate to contact us for expert legal advice the next time you encounter one of the red flags noted above.

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