No-poaching clauses go under microscope

Publication: No-poaching clauses go under microscope
Article Date: September 11, 2018

Agreements should be reasonable to hold up in court: Lawyers -

A massive antitrust lawsuit in the United States has thrust no-poaching clauses into the spotlight, with one of Canada’s largest fast-food companies committing to a review of the practice in its franchisee contracts.

Restaurant Brands International, which owns Tim Hortons and Burger King, is considering moving away from the clause. In July, the clause was dropped by seven major U.S. food chains to avoid a lawsuit from the state of Washington, after the attorney general ruled it violated antitrust agreements.

“If you have a very specialized position — a position where the skills of the employee doing that position are very rare and very difficult to replace — in those situations, the company may want additional protections, and it would be reasonable to say that,” said Samfiru.

“For people in very senior or very specialized positions, where if you go to work for a competitor, it’s going to hurt me so much… it’s reasonable for me to expect from you not to do that, at least for a period of time.”

“There has to be a good reason, based on how specialized the position is, and also the potential damage that would be caused to the company losing the employee — if that employee left them. But from a public policy standpoint, it’s very difficult to tell an employee ‘You can’t go somewhere. You’re not allowed to work for certain companies.’”

That was the crux of the issue for the U.S. restaurant chains — McDonald’s, Auntie Anne’s, Arby’s, Carl’s Jr., Jimmy John’s, Cinnabon and Buffalo Wild Wings — served with litigation over serving staff, he said.

“It’s not a specialized position, it’s not a position that’s necessarily going to be that difficult to replace. It just doesn’t make sense,” said Samfiru.

“And a lot of these individuals are not making a lot of money. They’re going to be making right around minimum wage,” he said.

“By these provisions, you actually are preventing them from potentially bettering their spot in life by making a bit more money. That’s unfair, that’s unreasonable, and that offends a number of public policy considerations.”

“If these were senior individuals, individuals making a lot of money, individuals with very specialized provisions, I don’t think you’d see the same debate.”

As for non-competition clauses, the obligation has to be reasonable to hold up in court, said Samfiru.

“If it said, ‘You can’t work for a competitor, ever,’ I don’t care who you are, I don’t care what position you have, that would never be worth the paper it’s written on.”

Best practices

Going forward, case law surrounding these types of clauses will only become clearer, he said.

“It’s a matter of time, especially in an age where people do change jobs very frequently,” said Samfiru.

“Any contract that tries to prevent a frontline worker from changing jobs, or being hired somewhere, is probably not going to be worth the paper it’s written on, if properly challenged.”

Litigation is often served when an ex-employee actively attempts to take customers, clients or employees with him to a new business, said Simes.

“The vast majority of employees aren’t looking to ruin the business of the employer that they’re either currently working for, or just left, and are cautious not to do so.”

Plenty of case law exists in terms of how non-solicitation clauses are interpreted, she said.

The court will examine if the clause is reasonable, what geography is covered, and what type of customer or client is affected, said Simes.

“It could be the case that a clause is reasonable even if it does not have a set geographic region, as long as it’s very narrowly and specifically drafted.”

Non-solicitation clauses are enforceable by the courts and can be bulked up, said Grosman.

Intellectual property can also be further protected by expanding confidentiality clauses to include customer lists, he said.

“In many cases, you can’t stop someone from jumping ship. They just do it and they take whatever information. They say, ‘Well, it’s part of my expertise, and I should be able to take my expertise with me.’”

It is difficult to restrict employees from making moves to better themselves in terms of compensation or future well-being, but stick-and-carrot options do exist, said Grosman.

Educating employees around non-poaching, non-competition and non-solicitation clauses serves as the stick, while employing golden-handcuff methodology — ensuring the employee makes more money the longer she stays — is a carrot, he said.

Additionally, if the poaching employer knows, or ought to know, that a non-poaching agreement is in place, a case could be made that both the employer and the employee agreeing to leave his previous company could be held liable for breach of contract, said Grosman. The no-poaching clause prevented franchises from hiring workers away from other stores in the same chain — an act critics argue simultaneously blocked staffers from getting better-paying jobs at others.

Many no-poaching templates are “old-fashioned” and unenforceable in today’s workforce reality, according to Brian Grosman, founding partner at Grosman Law Group in Toronto.

“Poaching is decades old,” he said. “But these kinds of clauses are not common in Canada because they are, in my opinion, contrary to public policy.”

“They are non-compete-type clauses which restrict individuals from opportunities that they might otherwise have, and compensation that they might otherwise be entitled to,” said Grosman. “As such, they would be contrary to public policy.”

“The case law in Canada has been pretty clear over the last five or 10 years that courts will not enforce non-competition agreements in employment contracts.”

Legal concerns

Employee poaching occurs when an employer entices a competitor’s employee to leave her position and join its staff.

Similarly, non-solicitation and non-compete clauses are common in employment contracts, though most non-compete clauses are unenforceable in Canada, said Nicole Simes, associate at MacLeod Law Firm in Toronto.

“Employers still put them in to threaten employees or make them worried about what could happen if they were to go to a competitor,” she said.

“(But) most employers know they are not enforceable and don’t actually do anything about those after the fact if someone were to go work for a competitor.”

However, non-solicitation clauses — an agreement to not obtain specific clients or customers after leaving a company — are enforceable and more commonly used, said Simes.

“We see them frequently in sales-related positions, but they’re actually becoming almost a standard clause for every employment contract.”

In a free-enterprise society, competition is encouraged to promote growth and push progressive development, said Grosman.

“Now, in particular, poaching is popular because of the increased need for technological expertise,” he said. “If you can buy an individual by paying him more, you avoid the developmental costs in your specialized field. You just buy the person with the knowledge and away we go.”

“So there is a significant battle for brains going on right now, because of the highly technical kinds of proprietary information that companies want to gain, without having to spend millions of dollars in developmental costs.”

The restrictive covenants, including non-compete, non-solicitation, confidentiality and fiduciary duties, can make up two-thirds of contracts in the tech sector, said Grosman.

“This is a very big deal.”

Courts have been reluctant to restrict mobility and financial opportunities for individuals, unless there is a cogent reason to do so, he said.

“An ex-employee should not be able to raid his former employer and denude them of their key employees, and they understand that. But in terms of restricting your ability to take a job or earn more money, that on its face is contrary to public policy.”

Specialized positions

No-poaching or non-solicitation clauses are most common in sales, technology or specialized roles, said Lior Samfiru, a partner at Samfiru Tumarkin in Toronto. A restaurant server is not a specialized position, however, and, as such, these types of clauses — including non-hire — should be non-starters, he said.

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