In a recent case, a judge ordered two departing employees to pay an employer $132,581 plus prejudgment interest plus legal fees for breach of contract and breach of fiduciary duties.
The two employees resigned and immediately started soliciting the employer’s clients. In fact, one of the employees started soliciting clients before he resigned.
The court concluded that a non-solicitation clause which prohibited an employee from soliciting the employer’s clients for 6 months was enforceable.
The court also concluded that one of the employee’s, who was a relatively junior salesperson, had a common law duty not to solicit the employer’s clients while employed. The other employee who was a key salesperson had a fiduciary duty not to solicit the employer’s customers for a reasonable period of time.
How Damages Were Calculated
As far as calculating damages is concerned, the court quoted with approval from another case as follows:
Compensation for breach of fiduciary duty has a restitutionary objective. In a case such as this there are two different approaches to compensation:
(i) disgorging the benefits wrongfully acquired by the defendant, or
(ii) restoring the plaintiff to the position it would have been in if the breach had not occurred.
The first approach focuses on the defendant’s gain; the second on the plaintiff’s loss. The plaintiff may elect which approach to compensation they are seeking.
In this case, the court looked at the employer’s lost revenue and multiplied by 25% which was the employer’s gross margin.
Lessons to be Learned
- Require all salespersons to sign an employment contract with an enforceable non-solicitation clause.
- Remind all departing employees of their contractual obligations.
- Keep track of all revenues that are lost because a departing employee has solicited your customers and if it is a material amount then consult an employment lawyer to discuss a potential legal action.
For over 25 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on Ontario’s employment laws. If you have any questions, you can contact him at 416-317-9894 or at [email protected]
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