Fiduciary Employees – Can You Poach?

Written by on October 23, 2017 in Blog, Focus on Canadian Cases
Contracts and Agreements

Resigning from your job does not completely sever your responsibilities towards your former employer. There can be remaining requirements that past employees need to respect, such as not disclosing any confidential information gained while working for the previous employer. Further, there is a type of employee that has even more limitations on its actions after resigning – a fiduciary employee. In the recent Ontario Superior Court of Justice decision Cosolo v. Geo. A. Kelson Ltd., 2017 ONSC 4150 the Court outlines the responsibilities of a departing fiduciary employee when there isn’t a written employment agreement involved.

Background

Louie Cosolo worked for the engineering firm Geo. A. Kelson Limited (“Kelson”) for approximately 10 years. After several promotions, he attained the position of Vice President, Supply Chain & Procurement in 2014 – making him one of the five senior executives of Kelson. On October 30, 2015, Cosolo resigned from his employment with Kelson in order to become the CEO of ENGIE, another engineering firm. There was no written employment agreement between Cosolo and Kelson.

During his employment, Cosolo acquired and sold 43,000 Class E common shares of Kelson for $891,820.00, for which he was to receive 10 payments of $89,182, plus interest on the outstanding balance. He received the first payment while he was still working for Kelson, however, after he resigned, the payments stopped.

Kelson refused to pay the remaining installments, claiming Cosolo breached his fiduciary duty by soliciting Kelson employees.

Between January 9, 2016 and May 16, 2016, 5 employees of Kelson left the company to start working for ENGIE. Kelson alleged Cosolo enticed the employees to leave. However, Cosolo argued that the employees approached him about work opportunities at ENGIE.

Cosolo sued Kelson for the remainder of money owed for his shares.

Fiduciary Duties

Considering Cosolo’s role within Kelson, the Court found that Cosolo was a fiduciary employee. Since Cosolo did not have a written employment agreement with Kelson, his duties as a departing fiduciary employee are based purely on common law.

The Court gave a helpful overview of the duties of a departing fiduciary employee.

Generally, a departing employee has the right to compete with his or her past employer. The employee can also solicit business from the former employer’s customers if: 1) there is no valid restrictive covenant in the employment agreement that prevents this action; 2) material isn’t used that has been acquired from the former employer through fraud; and, 3) the employee does not misuse the employer’s confidential information.

A fiduciary employee, on the other hand, may not directly solicit his or her former employer’s customers for a reasonable period of time that is necessary to allow the former employer to retain the loyalty of its customers and to fix any disruption that the departing fiduciary employee may have caused.

What constitutes a reasonable period of time is determined on a case by case basis. Some of the factors to consider when determining the reasonable period were outlined in the Supreme Court of Canada case Canadian Aero Services Limited v. O’Malley, [1974] SCR 592 and quoted by this Court:

Among them are the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness and the director’s or managerial officer’s relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or, indeed, even private, the factor of time in the continuation of fiduciary duty where the alleged breach occurs after termination of the relationship with the company, and the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge.

While fiduciary employees must wait for the reasonable period to end before they can solicit customers, they are able to directly compete with their former employer unless they have a valid employment agreement that states otherwise. Further, they are able to accept business from former clients of their former employer, as long as they do not directly solicit them.

In the end, the Court determined that Cosolo did not breach his fiduciary duties since the Kelson employees approached him. Cosolo was entitled to damages for Kelson’s repudiation of its contract.

Lessons for Employees

If you are a fiduciary employee, you owe extra responsibility to your employer upon ending the employment relationship. While you can compete, if you don’t have an employment agreement that says otherwise, you are not able to solicit business from your past employer’s clients until the reasonable period has passed. If you don’t have a written employment agreement, you should speak to an Employment Lawyer to determine what duties you owe your former employer and for how long.

Lessons for Employers

Employment Agreements are essential to ensuring your business interests are protected after a fiduciary employee leaves your company. Properly drafted restrictive covenants can provide some clarity and protection over how the fiduciary can impact your business after he or she leaves. Speaking to an Employment Law Lawyer before hiring fiduciary employees will assist in ensuring your business’ interests are protected.

Minken Employment Lawyers is your source for expert advice and advocacy on today’s employment law issues. Whether you are an employer or an employee, we can help. Contact us to see how.

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