Employee said he was starting similar business in a few months
Question: A 10-year employee with our small company (three employees) just gave notice that he will be leaving in a few months to go into the same business for himself and plans to take customers with him. Can we dismiss the employee now without severance pay?
Answer: At common law, an employee is required to provide reasonable notice of resignation. In Oxman v. Dustbane Enterprises Ltd., the Ontario Court of Appeal ruled that upon receipt of a resignation notice, an employer does not have the right to waive the notice and treat the resignation as being effective immediately.
The employer can either accept the period of notice given by the employee, or terminate the employee’s employment and provide her with reasonable working notice of dismissal or severance compensation to which she is lawfully entitled. Where the resignation notice is accepted, the employer retains the right to dismiss the employee for cause during the resignation notice period.
In the scenario presented here, the employee has identified an intention to start a competing business and take customers away when he leaves. Does this provide the employer with cause for summary dismissal? At common law, the employee has a duty of good faith, loyalty, and fidelity, which is implied in the contract of employment. There may also be express duties set out in the employee’s written employment contract, if one exists. Included within the common law duty are obligations to serve the employer faithfully, to avoid conflicts of interest, and to refrain from competing with the employer.
Your employee is accordingly required during the resignation notice period to refrain from taking active steps to compete with the employer’s business by, for example, soliciting clients, diverting business opportunities and working on the establishment of his new business on company time. If he were to engage in such activities, the employer would likely have grounds to terminate the employment relationship for cause.
Having said that, the fact the employee has announced an intention to start a competing business does not, in itself, provide cause for summary dismissal. At common law, it is acceptable for an employee to spend time outside working hours on the establishment of a competing business, provided the employee does not engage in competitive activities while still employed.
After the employee resigns, his good faith duty will survive to the extent that he must not disclose the employer’s confidential information to third parties, or use such information to compete unfairly with the employer. If he were to breach this duty, the employer may be able to obtain an injunction or commence an action for damages.
If the employee occupies a fiduciary role, he will have additional obligations to the company. The general characteristics of a fiduciary relationship, as set out by the Supreme Court of Canada in Frame v. Smith, include the following:
•The employee has scope for the exercise of some discretion or power.
•The employee can unilaterally exercise that power or discretion so as to affect the employer’s legal or practical interests.
•The employer is peculiarly vulnerable to or at the mercy of the employee holding the discretion or power.
Employees such as directors, officers and senior employees in “top management” positions have been found to owe a fiduciary duty to their employers. Where an employee is a fiduciary, the employer can expect some common law protection for a reasonable period after termination of employment, to prevent the former employee from soliciting customers or employees of the employer. What constitutes a reasonable period of time depends on the circumstances, but will generally not exceed 12 months.
For more information see:
•Oxman v. Dustbane Enterprises Ltd., 1988 CarswellOnt 903 (Ont. C.A.).
•Frame v. Smith, 1987 CarswellOnt 969 (S.C.C.).
