Supreme Court Clarifies Post-Employment Duties

In a significant decision clarifying post-employment duties of departing employees, the Supreme Court of Canada held a former manager at RBC Dominion Securities' branch in Cranbrook, British Columbia, personally liable for almost $1.5 million in damages for coordinating the mass departure of RBC's investment advisors to join competitor Merrill Lynch. Released on October 9, 2008, the decision provides comfort to employers by reversing most of the Court of Appeal's findings and concluding that the branch manager breached his duty of good faith by coordinating the exodus.

The Mass Departure

In November 2000 virtually all of the investment advisors at RBC's branch in Cranbrook crossed the street to join direct competitor Merrill Lynch. The move was coordinated by Don Delamont, RBC's branch manager. Consistent with a desire to quickly transfer existing clients from RBC to Merrill Lynch, none of the departing employees provided advance notice of their resignations, all of which were effective on the same day. In addition, prior to the coordinated announcement of their resignations, the departing employees copied RBC's client records and transferred the records to Merrill Lynch. The net effect of these actions was that RBC's branch in Cranbrook all but collapsed.

Trial Judge Critical of Conduct

None of the departing employees had written employment contracts that required the employees to provide advance notice of termination. There were also no contractual postemployment restrictive covenants (i.e., non-competition or non-solicitation clauses). Nonetheless, the trial judge was offended by the conduct and the findings included:

• Delamont breached his duty of good faith in performing his duties and was ordered to pay personally almost $1.5 million damages, representing RBC's lost profits resulting from his breach;
• the departing employees breached their implied duty to provide reasonable notice of their resignations; the departing employees breached their duty not to compete unfairly (i.e., working for Merrill Lynch during their notice period caused damages that extended beyond the notice period);
• an award of punitive damages in the amount of $5,000 against each departing employee for taking RBC's client records; and
• an award of punitive damages in the amount of $250,000 against Merrill Lynch.

Court of Appeal Emphasizes Lack of Contract

The British Columbia Court of Appeal reversed significant portions of the trial judge's findings. The lack of written contracts with any restrictive covenants was critical to the Court of Appeal's findings. It concluded that there was no general post-employment duty not to compete unfairly and that Delamont did not breach his common law duty of loyalty by not discouraging the employees from leaving for a competitor.

SCC Post-Employment Duties

Employee Has Duty of Good Faith

The SCC restored the majority of the trial judge's findings. Importantly, the SCC's decision restored the trial judge's finding that it was an implied term of Delamont's contract that he would perform his functions in good faith, those functions included retaining the employees of the branch under his supervision and that in organizing the mass departure Delamont breached this duty. The award of almost $1.5 million against Delamont personally is a significant deterrent to managerial or senior employees coordinating the departure of employees to a competitor.

No General Duty to Not Compete Unfairly

The SCC agreed with the Court of Appeal that there is no general duty not to compete unfairly and that it was inappropriate for the trial judge to make a damages award in respect of this claim.

Regardless of there being no general duty to not compete unfairly, the SCC decision is good news for employers because it confirms that employees have an implied duty:

1. to perform functions in good faith;
2. to give reasonable notice of termination; and
3. not to misuse confidential information.

What This Means to You

If your Employees are leaving to join a competitor

1. Remind employee of duty to provide notice of resignation if it is not provided.
2. Do not terminate the employees' employment effective immediately. Advise the employee that he/she remains an employee until the effective date of the employee's resignation and place the employee on “garden leave” in order to provide time to solidify client relationships.
3. Collect all company property including client lists and remind employee of any post-employment duties, including confidentiality.

If you are hiring employees from a competitor

1. Tell employees to provide reasonable notice of termination to the former employer to reduce the likelihood of a claim for inducing breach of contract.
2. Have new hires sign a written employment contract, including a provision that confirms the employee is not in breach of any prior obligations. A written contract may also confirm the employee's duty of confidentiality, duty of faithful service, reasonable notice of termination and any applicable restrictive covenants.

If you are the employee joining a competitor

1. Provide reasonable notice of your resignation.
2. Seek an indemnity from your new employer in respect of claims from your former employer.