A Limit to the Continuing Obligations of Fiduciary Employees

Feb 11, 2019

We often get calls from employees who have resigned or have been terminated and are looking to start their own business. They usually want to know whether they have a duty not to compete and/or solicit clients from their previous employer.

Although an employee’s post-termination obligations can be determined by whether their employment contract contains a non-solicitation/ non-competition clause, a “fiduciary” owes continuing obligations to their former employer regardless of the terms of their employment contract.

To determine whether you are a “fiduciary” a Court will consider a variety of factors, however oftentimes if an employee held a position that required a high level of trust and confidentiality or dealt with information that could negatively affect their employer’s interests, an employee would be deemed a “fiduciary employee”. Even after termination, a fiduciary employee’s obligations to their former employer continue to survive for a reasonable period of time post-termination.

Nevertheless, there is still a limit to the scope of a fiduciary employee’s post-termination obligations when the employee is wrongfully terminated. In particular, in Palumbo v. Quercia, 2018 ONSC 5034 the Court ruled that the restrictions on soliciting clients from a corporation will not be as strict for an unfairly terminated fiduciary employees.

In Palumbo, the employee was the co-founder of the company and was the primary contact for a client who represented over 50% of the company’s revenue. The employee had a longstanding relationship with the client that preceded the founding of the company by fourteen years. When the employee was diagnosed with cancer, his two-counders convened the first-ever shareholders agreement , removed him as an officer of the company and terminated him for cause.

When the client learned of the employee’s termination it severed its relationship with the company and afforded its business to the employee’s new company, which caused the employer company to lose a significant source of income.  The employee commenced an application to purchase his share at the fair market value., and the Company commenced a counter-application alleging breach of fiduciary duty and sought damages for the loss of their client.

The Court allowed the application and dismissed the counter-application on the grounds that the non-solicitation obligations of a fiduciary employee that was unfairly terminated were “not as strict as a fiduciary employee who voluntarily left his employment and solicited clients.”

Lessons for Employees

  1. The circumstances surrounding an employee’s termination are an important consideration for determining their fiduciary obligations.
  2. Not all employees are fiduciary employees. Even if you are not a fiduciary employee, you could still have a duty not to solicit clients if your employment contract contains a non-solicitation clause. The courts will generally enforce a non-solicitation clause in an employment contract if the length of time it applies for and the scope of the clients concerned is considered reasonable.
  3. You should consult a lawyer to review your contract as it is very common for employers to draft overly restrictive and unenforceable non-solicitation and non-compete clause

If you would like to speak to a lawyer at the MacLeod Law Firm, you can reach us at [email protected]

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