January 16, 2018 by Greg Meckbach
Broker principals need to draft employment contracts carefully if they don’t want disgruntled ex-employees to steal their customers after leaving the brokerage, an employment lawyer suggested to Canadian Underwriter Monday.
When attempting to draft bullet-proof contracts, bear in mind that courts may refuse to enforce some clauses, said Richard Stephenson, a lawyer for Paliare Roland Rosenberg Rothstein.
Stephenson offered three insights into protecting brokerages from messy breakups. His comments are general in nature and do not refer to any specific case, nor should they be construed in any way as legal advice. He is speaking in general about Canadian law in provinces outside Quebec.
Brokerages can go after workers who take customer lists
Employers can protect themselves by stipulating in employment agreements that employees are not allowed to take customer lists — either in paper or electronic form — after they leave, said Stephenson.
“The customer or client list is clearly the employer’s property,” he said, adding it is off-side in the eyes of the courts for an employee to take a customer list with them when they leave.
An employer could ask a court to order a former employee to hand back or destroy their customer list.
“Sometimes just a demand letter from a lawyer can be enough,” Stephenson said, commenting in general on Canadian law in provinces other than Quebec.
When the courts are likely to enforce non-compete agreements
It is “not uncommon,” Stephenson said, that when a brokerage buys out a part-owner, the sale agreement will stipulate that the former part-owner cannot compete with the brokerage “for a period of time.”
But non-compete agreements that deal with ordinary employees are much less likely to be enforceable in court than non-compete agreements dealing with former part-owners, or even senior managers, he added.
“The more senior you are, and the more you are identified as the face of the business, the more probable it is that [a non-compete agreement] is going to be enforceable,” Stephenson said.
Non-compete agreements can be “found unenforceable” if the court finds “they have the effect of preventing someone from working in their field,” Stephenson said, commenting in general about employment law in provinces other than Quebec and not about any case in particular.
When a non-solicit clause can be enforced
In some cases, instead of having a non-compete agreement, a brokerage could draft a clause in an employment contract preventing a broker from leaving and subsequently trying to solicit that employees’ customers.
“It is almost always okay to restrict somebody from soliciting their own customers, clients that they have actually dealt with and managed,” Stephenson said. “It’s not okay to restrict solicitation from people or clients that they really had nothing to do with.”
In other words, a court would likely take a dim view of a non-solicit agreement that states the worker cannot solicit any client whatsoever from the firm.
When drafting a non-solicit agreement with an employee, it is important for the employer to enter that agreement “prior to the person becoming an employee,” Stephenson said.
If the non-solicit agreement is made after the person is hired, “then you have to pay the employee something in exchange for this provision,” he said. “It does not have to be $1,000. It could be a much more modest amount, but you have to give something.”
It is also important to narrow the non-solicit agreements by time. For example, they could expire six months after the employee leaves the company.
Furthermore, employers wanting employment contracts that are actually enforceable should restrict non-solicit agreements to the products the employee was selling, Stephenson said.
This means a former worker could still sell products to the same customers or clients with whom he or she worked at the brokerage, just not the same products he or she was selling while at the firm.