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First they quit, and now they're stealing your business?

So, one of your employees quit and has started a business in direct competition with yours.  While the law will allow this, if he or she was a key employee, there are a number of things they cannot do. 

An employee will be a key employee if:

1. They have knowledge of your customers and their needs. This does not mean just a list of clients, but knowledge of who the important contact people are and their intimate needs;
2. They have access to the employer's special or confidential information;
3. They know the names of your suppliers;
4. They have knowledge of your pricing scheme and authority to make pricing decisions;
5. They are able to exercise some discretion or power within your company so as to affect your legal or practical interests; and
6. The employer is at the mercy of, or is peculiarly vulnerable to, the departing employee in the sense that they are dependant on that person.

While it is not necessary for all the forgoing criterion to be met the last element is critical.  It should also be noted that the duties imposed will extend to independent contractors if they fall within these criterion.

There are basically three duties:

1. the duty not to exploit an emerging business opportunity;
2. a duty not to directly solicit the former employer's clients; and
3. a duty not to solicit the former employer's employees.

An emerging business opportunity is a 'deal' or contract which the company is in the process of making.  The deal will be stolen if the departing employee 'lands it' for himself or his new employer.  If the employee is pursuing a new opportunity, they will be permitted to do so. 

A former employee will also be prevented from soliciting an employer's clients for a reasonable period of time, typically in the range of six months to a year.  The point here is they are not permitted to contact their employer's clients for the purpose of soliciting their business. They may however, advertise to the general public or invite a potential customer to attend a 'grand opening'.  If the customer chooses to follow the employee because of a sense of loyalty, the Courts will not interfere. 

The third restriction is on hiring away employees.  The law is not very clear on what will constitutes 'hiring away'.  In one case the departing employee asked another if he would be interested in a new job.  In another case the departing employee let some of the employees know if they left  the company and were looking for work, there might be some at his new company.  In the first case the Court held in favor of the former employer.  In the second, it held in favor of the departing employee.

In the event that a departing employee commits any of the foregoing acts, then the former employer may bring an action against him or her to prevent them from doing so and force them to account for the lost profits or costs incurred as a result of their actions.  The key is to consider whether you think the departing employee can really hurt you.  If they can, then you'd be wise to retain counsel to enforce your company's rights.

Lastly, it is important for both legal and practical reasons to act quickly if you intend to take any action.  Delay in these sorts of cases can be fatal.

While, in the interests of free enterprise, our Courts will allow departing key employees to enter into competition with their former employers, they will protect the employer by ensuring the employee has only limited access to the employer's business opportunities, clients and employees.

This article is intended for information purposes only.  If you have a specific legal problem, you should consult with a lawyer.

By Tom McCartney
April 3, 2002