Toronto Employment and Labour Law Blog: Navigating the Executive Compensation Landscape

Question: Is it worth putting a non-compete provision into an employment contract?

Grosman: It is not, because in most cases it is unenforceable. It is contrary to public policy to restrict a former employee from doing what he or she does best. This is particularly the case if the agreement also contains a clause forbidding the solicitation of clients, suppliers or staff for a period of time. Courts have ruled that the employer is adequately protected by the non solicitation restriction and that to combine it with a non-compete clause is “over kill.”

Of course there are quite legitimate ways to make a non-compete clause enforceable. One way is to reward the employee for agreeing to enter into a non-compete clause. The problem arises when an employer decides, during employment, to insert a non-compete clause in an existing agreement. If that is the case the employer must compensate the employee for adding this restriction to his on-going agreement, if it is to be enforceable.

Question: Can search firms raid the competition for key players?

Grosman: Raiding competitors for key employees seems to be on the rise. If the raider, potential employer, knows that the targeted employee is bound by contract, with an enforceable non- compete restriction, not only will the departing employee be liable for breach of contract but the raiding new employer will face a potential lawsuit for inducing the breach of the employee's contract. The vulnerability of the raider is based on the fact that it knew or ought to have known that inducing the employee to leave will result in a breach which the raider induced. Even if the employee made the first contact the new employer may face a successful claim for damages for inducing breach of contract from the former competitor employer. Raiders beware.

Question: Is it common practice for employees dismisses or fired to get one month for every year that they have worked?

Grosman: Too many employees and some lawyers believe that an employer must provide one month's notice or severance for every year of service. Some employers believe that their only obligation, on termination, is the small amount set out in the Employment Standards Act of Ontario. Both are wrong.

Unless there is a contract which specifies what is to be paid on termination, most executive employees are entitled to their common law rights, which usually are based on years of service, age, level of responsibility and the market for reemployment. In addition, there is the question whether an individual may be terminated for justifiable cause and receive no notice or severance. An employee enticed away from long-term, stable employment who finds that the new position does not work out after a couple of months on the job will be entitled to a substantial payout beyond Employment Standards and much more than one month per year.

I’ll tell you a story. One of my clients, a senior executive, was interviewed in Vancouver by the Vice-President of Human Resources of a Toronto-based company. He was offered the position of Chief Financial Officer, which he accepted. Within a number of weeks he had sold his home, packed up all his belongings, and he and his wife and three children moved to a new house that he had purchased in Toronto. He arrived at head office to be met by an executive who professed no knowledge of his being hired by the company. When he asked for the Vice-President of Human Resources he was told that he had been “let go” the previous week. The corporate executive said that it was too bad and wished him a good trip home. He had not worked one day. Nonetheless a negotiated settlement provided six months’ compensation lump sum payment and all out-of-pocket expenses associated with the move to Toronto and the return to Vancouver, where he was welcomed back to his former position with “no hard feelings.”

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