Summary of Presentation Allan Wells, Partner, Osler "Employment - PDF document

Summary of Presentation– Allan Wells, Partner, Osler "Employment Agreements - Trends in Recruitment, Retention & Restrictions" The following high level summary of the presentation made by Allan Wells (drafted by ICAC,)describes some general trends in how companies are maximizing their ability to recruit, retain and restrict activity of key employees through employment agreements. 1) Recruitment - Trend Away From Using Detailed Employment Contracts. This is in the early stages but there is some trend towards doing away with the old 10-20 page employment contracts. The thinking is the longer the contracts, the more rights the employee/executive have and therefore, the more issues there are to litigate when issues arise. The alternative to this is a simple one page agreement that outlines start date, base salary, high level variable compensation (i.e. short term annual bonus and reference to options/long term plans with details attached), and a clause that employee agrees to be bound by all policies and procedures written by employer. (Include attached copy) Termination is not included to avoid being committed to a specific 12 -24 month clause; preferable to have details subject to negotiation at termination or left to common law/judge. This trend is occurring as many employers feel there is a lot of negotiation at the departure time anyway regardless if termination clause included. Many employers still prefer the detailed agreements but there is clearly some advantage towards the basic agreement. 2) Retention No major developments or trends in this area. Important, however, to make sure start date allows for reasonable notice with former employer. There was a recent case involving employees that left RBC Dominion and went to Merrill Lynch. A major factor in dispute was the lack of reasonable notice provided by the employees who did not provide 2 weeks notice. When key employees resign and provide notice, it is difficult to decide what responsibilities they continue to have or whether better that they leave immediately. In situations where they have access to customers and sensitive information, it is preferable to minimize their continued access to customers and key information. Some employers are managing this situation through the use of a “garden leave” clause included in the original employment agreement. A “garden leave” clause allows an employer to ask employees to stay at home, (tend to garden is historical English origin of phrase) with access to the office and duties only as requested by employer. The clause minimizes risk of a constructive dismissal allegation. It in effect is a short non-compete and does allow employer ability to access employee for transition issues. Courts are still a bit uneasy with these clauses so prudent to keep ideally at 2 weeks and no more than 4-6 weeks otherwise perceived as a forced non-compete. These clauses can also be used in cases where there is a performance issue that requires the employee to be away from office and employees and customers (eg. allegation of harassment, insider trading etc). During garden leaves, employees are paid full salary.

Overall, it was noted that if trying to utilize compensation as a way to maximize retention, two ways to do this – deter through money being left on the table if they depart before payout date or making it difficult to obtain another position in the industry through a “non compete or non solicitation clause.” It was noted that non solicitation and non competes are not looked upon favourably by the courts and that they are difficult to enforce. They do however act as a deterrent to people soliciting former employees and going to key competitor. If for example, you have option plan that vests a certain time in future, the plan deters employee from leaving till that time or makes it expensive for future employer to hire earlier, as employee will not want to leave that compensation on the table. You could have clause however that says if depart after certain comp. pay out (eg. exercising options) you have to pay back certain portion if leave within time period. Courts have honoured those agreements. A key part of determining what is fair and reasonable in a non solicitation case is whether the employee has a fiduciary relationship with employer. In a recent BC court case, 2 fund managers who controlled 25% of funds left company. Court determined that in this case the fund managers didn’t have fiduciary duty and clients had right to move with them given trusted relationship. Employers need to be careful with not having too many hooks that keep employees after they want to leave. Don’t want someone around 12 months if they have decided not committed to organization and want to leave. What you want to ensure is that they are not damaging relationships with clients. Need to also respect fact that employees often bring clients with them so can not expect to control those clients following former employee. Key people with fiduciary relationship with employer have responsibility at the highest level, and the courts have ruled in favour of employers, expecting key employees need to leave business alone for a reasonable time. It was noted the difference between employer/employee fiduciary relationship and employee/client fiduciary relationship. Many ICAC member employers may have a fiduciary relationship with their clients but may not be in a fiduciary relationship with employer. A fiduciary is key employee who legally has power to exercise independent decisions with significant impact on the business. With these individuals, courts have clearly said they can’t solicit customers or employees for reasonable time. Courts often consider restrictive covenants not enforceable – burden of proof is on employer to prove clauses reasonable. Confidential information is protected by common law absolutely. Companies need to make clear through policies and procedures what is deemed to be confidential. Information can not be used to benefit themselves or a future employer. There is a US doctrine, which has not come to Canada yet that suggests employees at senior levels with long service, know so much about the companies – strategy, focus, and investment plan etc. that you can’t reasonably expect them to not use the information with future employer.

Summary – If you want to keep people, can include clauses in employment agreements that are reasonable and then they will more likely be enforceable. As employer, need to look carefully at new employees former employment agreements to understand any restrictions they may have on them. With departing employees, employers often classify immediately whether a “good leaver “or a “bad leaver”, and manage the termination process accordingly. Shareholder agreements more likely to be enforced given bargaining deemed to be on more equal terms equal strength etc.. If any ambiguity in agreements, courts tend to rule in favour of person who did not draft the agreement.