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Restrictive Covenants: A Cautionary Tale

Q: My Organization is involved in selling products in a specialized market and there are only a handful of competitors. Our customer lists are very sensitive information and the lifeblood of the organization. It has come to my attention that two of my key sales employees plan to resign to work for a competitor. Is there anything I can do to prevent these former employees from exploiting and misusing my organization's sensitive customer information once they resign?

Simon R. Heath.
B.A., MIR, LL.B.,
Keyser Mason
Ball LLP
I grapple with this issue all of the time. My clients want to know how they can protect their sensitive client information or what the courts call “proprietary information” when management and/or sales employees are about to resign and work elsewhere or where they have already resigned and are working for a competitor.

Unfortunately, in the absence of express written restrictive covenants in the employee’s employment contract it can be difficult for an employer to protect its proprietary information. In the absence of express written restrictive covenants an employer would have to rely on implied contractual obligations and/or fiduciary duties to prevent the misuse of its information which can be difficult to enforce.

My advice over the years has consistently to spend the time at the start of the employment relationship to properly draft a “non-solicitation of customers” clause, a non-solicitation of employees clause and in exceptional cases a non-competition clause (which depends on the facts of the particular case).

If an employer has existing employees that it wants bound by a restrictive covenant it must offer the employee something in return for agreeing to be bound by the restrictive covenants – something the courts call “consideration”. A stock option grant or bonuses are excellent opportunities for employers to provide employees with consideration in exchange for the signing of restrictive covenants.

Q: Will courts enforce these restrictive clauses?

Restrictive covenants are clauses that can be placed in employment contracts that impose contractually binding obligations on employees that survive once the employee’s employment ends (that is they are post-employment obligations). There are three primary types of restrictive covenants: (1) non-competition clauses which prohibit employees from competing with their former employers; (2) non-solicitation clauses which prohibit employees from soliciting the customers and/or suppliers of his/her former employer; and (3) non-solicitation of employee clauses which prevent departing employees from soliciting the employment of their former colleagues.

The key aspect to understanding restrictive covenants is to understand when a court will uphold them. As you can imagine, the courts are generally loath to enforce a contractual provisions that not only survives the cessation of an employee’s employment but also prevents an employee from engaging in his/her chosen line of employment. The courts are very concerned with maintaining labour mobility and only restricting it in the clearest of situations.

Recently the Ontario Court of Appeal confirmed in H.L. Staebler Company Ltd. (2008) the proper test to be used to assess whether a restrictive covenant is binding and valid and should therefore be enforced by a court. Although this case arose in Ontario, its principles are persuasive throughout the rest of Canada.

The Court of Appeal confirmed in Staebler that the long-standing test to decide if a restrictive covenant is enforceable is to assess if it is reasonable between the parties and with reference to public interest. The reasonableness of a restrictive covenant is assessed on the basis of three primary factors: (1) does the employer have a legitimate proprietary interest to protect (that is, is there something inherent to the employer’s business that requires the protection of a restrictive covenant such as sensitive client information?); (2) are the temporal (i.e., time-limits in terms of years) or geographic features of the covenant too broad? The courts have held that narrowly drafted clauses are more likely to be enforceable than clauses which are too long in time such or those that contain an overly broad geographic limitation or no geographic limitation at all; and (3) Is the clause unenforceable as being against competition in general in that it prevents the individual from working in his/her chosen field?

Further the court held that in general a non-competition clause, which contains a blanket prohibition against the employee from competing with the former employer, would be the exception and not easily enforced. This is because an employer would need something very compelling to keep an employee out of work for an extended period of time. As a result, employers are encouraged to attempt to protect their proprietary interest through a non-solicitation clause rather than a non-competition clause.

Once a restrictive covenant is in place and it is alleged to be breached employers have a contractual basis to ask a court for relief in the form of an injunction to stop the competition or solicitation of customer or damages for lost profits or misuse of proprietary information.

Simon R. Heath, B.A., MIR, LL.B., is an associate in the law firm Keyser Mason Ball LLP and can be reached at sheath@kmblaw.com

When Outside Recruiters Are Outside the Budget

Q:Our organization needs to make some hires in the next few months, but in this economy, I'm not looking forward to paying 20% (or more, for senior positions) in recruiting fees. And when we've posted ads on job boards, we get bombarded with applications from unsuitable people. Is there a better way?

Paul Dodd,
The contingency fee recruiting model - whereby an organization pays the recruiting agency a fee equal to a percentage (usually 20%) of the new hire's annual salary - has always been something of a bitter pill for organizations to swallow, but it's persisted for one reason: the organization doesn't pay anything until and unless they actually make a hire.

Recruiting in 2009 is presenting some interesting challenges for organizations: the talent shortage that has been building for the past few years so far shows no sign of abating, while the uncertain economy means that organizations have to get more out of their recruiting dollars and internal resources than ever before.

The good news is that there are lots of ways in which your organization can facilitate the recruitment of top talent, without having to pay huge contingency fees - or tie up internal resources sourcing and screening unsuitable applicants.

Here are just a few:

Keep track of bridesmaids and boomerangs

For many organizations, the recruitment cycle stops when a hire is made: the resumes and contact information of unsuccessful candidates get put in a forgotten file in the back of a desk drawer, never to be looked at again. Even the 'bridesmaids' - the two or three top candidates who were interviewed but ultimately not hired - get nothing more than a brief 'thanks but no thanks' email and nothing in the way of follow-up contact.

Consequently, when the organization is looking to fill a similar role, 12 or 18 months down the line, the recruitment process has to start from scratch again.

This is also true for 'boomerangs' - former employees who left on good terms and would make great re-hires.

Staying in touch with these bridesmaids and boomerangs (even just an email once or twice a year, to ensure you've still got the right contact info) - increases the chances that the next time your organization wants to make a hire, you'll be able to put your finger on the right person, fast - without ever having to engage a recruiting agency.

Employee referrals: the #1 source of A-list candidates

It's a fact: A-list employees tend to know A-list candidates - and 80% of recruiting professionals say that referrals from current and former employees are the single best source of great hires.

But you have to ask for referrals - outside of the recruiting department, it doesn't necessarily occur to employees to randomly refer their friends or colleagues. It's worthwhile to set up a formalized referral process (many companies make it part of their corporate intranet) and a referral reward program (whereby the referrer is paid a cash bonus of anywhere between $1000 and $2500+ for referring a candidate who is successfully hired) - and then keep it top-of-mind by sending out regular reminders or specific requests for referrals.

Consider engaging recruiters 'by the hour'

Contingency-fee-based recruiting models can seem like a good deal (after all, if you don't make a hire, you don't pay), but it brings with it all the drawbacks of any commission-based transactions: the recruiting agency has a vested interest in just throwing bodies at the wall until something sticks. They aren't dedicated to you (they may be recruiting for many positions, at many companies, at the same time), and they aren't on-site with you so they don't have first-hand knowledge of your organization.

A good alternative is to engage a recruiter 'by the hour'. You pay for the recruiter's time - typically anywhere from $40-$100 per hour - but don't pay a fee.

Deliver great candidate experiences - and build the 'buzz'!
The more A-list candidates you attract to your organization directly - candidates who are interested in working specifically for your organization - the less time and money you'll spend on sourcing and recruiting them.

But how do you attract these A-listers if you can't offer Google-like perks such as on-site health clubs and free snacks in the cafeteria, and don't have a huge marketing budget?

Simple: just ensure that every candidate who interacts with your recruitment team has a great experience. Think of candidates as customers, and your organization as a retail store: if people have positive experiences with your website, your customer service department, and when visiting your store, they'll come back - and more importantly, they'll tell their friends. Word-of-mouth is especially important in recruiting, because for most people the first step in looking for a new job is speaking to friends and colleagues. And it's amazing how quickly word can spread when you don't deliver a great experience.

Paul Dodd is the President of Head2Head (www.head2head.ca), a company that specializes in delivering innovative recruiting solutions by bringing bottom-line thinking to clients' HR and recruiting functions. Paul can be reached at 416-440-2030.

Reacting to Fraud in the Workplace

Q: We are considering the termination of an employee who we suspect has been stealing customers’ payments and then manipulating the accounting records to cover up the theft. What should we do to handle this situation the right way?

Some organizations make the mistake of terminating employees for suspected fraud prior to gathering all available facts. Courts and labour boards have little time for employers who fail to undertake a complete objective investigation and who fail to give the employee an opportunity to respond to the allegations, prior to terminating an employee.

Sue MacMillan
Undertake the investigation as soon as you become aware that there may be suspected fraud. Investigations are not something that we enjoy doing, but it is important to start asking questions as soon as a suspected fraud comes to light. Putting off an investigation may result in bigger problems including other employees assuming that fraud is acceptable behavior or that it is not important to management. Also, investigation delays may lead to a loss of valuable evidence. Take time to conduct a thorough investigation, but be sure to conclude the investigation in a timely manner. Investigations that are unnecessarily prolonged make it difficult for everyone, including the suspected employee.

Protect the rights of the employee. Many organizations advise that all computers, offices and equipment used by the employee for work purposes belong to the employer. Therefore, the employee should have no expectation of complete privacy. However, in an investigation, before retrieving an employee’s deleted email messages or taking other action that may be construed as invasive, organizations should ensure that privacy rights, company policy and collective agreements support such actions or at least, do not preclude such actions.
Also, once employee information is collected, organizations have a duty to properly secure it and ensure that it is used or disclosed only to people who have a need to know.

Advise the employee of the allegations. Employees should be informed of the nature of the allegations and given the opportunity to respond. Employers should refrain from interrogating employees, but should question the employee with the objective of gathering facts and other information. During an investigation, employees have an obligation to be honest and forthright. A failure to cooperate may be viewed as insubordination and the employee may be disciplined.
Keep a record of your inquiry. All meetings, discussions and interviews with employees should be documented accurately and in detail. These can be especially useful if there is a challenge to discipline or termination. You may have to produce these notes at a hearing or trial, months or years afterward.

Action to be taken. Once information has been gathered, including the suspected employee’s response, the employer should consider the most appropriate action, which may include termination or suspension of the employee, pending a more detailed investigation. Concerns about other employees, customers, and the preservation of electronic and physical records may make a convincing argument for the employee suspension. Uppermost, the employer needs to “stop the bleeding” or in other words, ensure there are no further losses through the suspected employee’s actions. Depending upon the circumstances, suspension may be with or without pay.

In cases where investigation absolves the employee, ensure appropriate action is taken to clear/reaffirm the suspect’s corporate reputation. Further, where the investigation discloses what may be a criminal offence, the employer also has to decide whether the matter will be turned over to the police.

Workplace investigations can be stressful but following the proper process can ensure an appropriate outcome that protects the rights of the worker and the employer.

Sue MacMillan, FCA, CFE, CFI is a Partner with Grant Thornton LLP based in Halifax and leads the Forensic Accounting and Investigative Services practice for Nova Scotia and can be reached at sue.macmillan@ca.gt.com

Academic vs. Business Writing Styles

Q. I have always received top marks for my writing assignments throughout my academic life. Now that I am in the workforce, my manager claims my writing style needs improvement. I cannot comprehend his remarks. Is the problem really with me or with my manager?

I think your first sentence is a good indication of the problem. There are many different writing styles, e.g., academic, business, legal, literary, technical, and scientific. Each style has its own audience, purpose, and guidelines.

It is wonderful that you did well in academic writing. I believe it is the basis for all other styles. However, it does not always work in the business world. Why? The answer is in the readership and the purpose.

Jane Watson,
J. Watson Associates
In the academic world (from grade school, high school, college, and undergraduate level at university), you write for one reader who already knows the topic. Your reader’s objective is to read your paper and mark it according to how well you understand the assignment. Ideally, the marker reads the entire document, determines a mark for individual points, adds them up, and assigns an overall score. Organization and visual appeal, while important, are not crucial as all parts are usually read – if the marker takes his or her job seriously. The tone is normally formal because you are trying to impress your reader with your knowledge and literary skill.

In the business world, you write to busy people who are not necessarily conversant with the topic. In addition, they are working under time constraints and are overwhelmed with the amount of information to be read. These readers appreciate simple words, short sentences, and visual appeal (white space, lists and subheads). Although business and academic readers may have the same educational background, how they read is different. Business readers tend to skim documents. They need a strong organizational structure and a document that appears easy to read.

Never require your reader to interpret your message. State your thoughts clearly. As the writer, C.S. Lewis once said, “I sometimes think that writing is like driving sheep down a road. If there is any gate to the left or right, the readers will most certainly go into it.”

A business reader should be driven through a document with sentences that start with connecting words, such as in addition, however, therefore, as a result, for example, and, but, etc. First, second, third and last also work well.

Yes, I did use and and but. Business writing is all about relationship building and selling — not only products and services but ideas, courses of action, recommendations, and your personal and company image. Therefore, an effective business writer must be able to use three tones: formal, neutral, and informal. A formal tone is usually used for reports, a neutral for some letters, and an informal tone for most emails. Remember when you want reader buy-in, your best bet is an informal tone.

By the way, informal does not mean sloppy. It just means more conversational. “And” and “but” are great words to connect thoughts and to create a warm, friendly tone.

In addition, the most persuasive business documents are those that use personal pronouns, active voice sentences, and contractions. This is a far cry from academic writing, which does not require – or need – these things.

Another difference between academic and business writing is the word emphasis. Academic writing tends to focus on nouns. For example, in a school essay, I would write, “A decision was reached.” But, in a workplace document, I would say, “We decided.” The focus is on verbs. That is why I tell participants in my writing workshops to unsmother the verbs when they edit their documents.

In the academic world, you are taught one thought per paragraph. In the business world, this might intimidate your reader. Short paragraphs appear easier to read. That’s why I recommend paragraphs in the body of a print document be no longer than eight lines and no longer than five lines in a screen (email or web) document. Naturally, the first paragraph on a page or screen should be the shortest paragraph. The shorter the length the more likely it is to be read.

These are just a few of the differences between academic and business writing. However, you should now have a basic understanding of what your manager is talking about when he says your style needs to be adjusted. In the business world, your goal for written communication should be to deliver a clear, easy to read message – with the appropriate tone – to a busy reader.

Jane Watson, president of J. Watson Associates Inc., is a trainer, author and consultant in the field of written business communications. Visit her website www.jwatsonassociates.com or call her at 905-820-9909.


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