BUSINESS/EXIT — Prize Employees
Every consulting engineering firm has senior people with a golden touch when it comes to dealing with clients. You know the type: the grey-haired guy in the corner office who always has time to chat with clients and set them at ease. His...
Every consulting engineering firm has senior people with a golden touch when it comes to dealing with clients. You know the type: the grey-haired guy in the corner office who always has time to chat with clients and set them at ease. His expertise is second to none, and if a client comes in for his type of project, he’s the one they want; he’s the one they trust.
So when Jack-in-the-corner-office hands in his notice and walks out of the door, it is a great blow to the company.
Lose the person and many of your clients go with him -along with their fees.
Anticipating that staff will desert the ship at some point in the future, most firms ask their senior people to sign non-compete or non-solicitation agreements. Such contracts are intended to restrict your ex-employee from working in competition with you for a certain period in a certain area and region. They are also written to prevent your former employee from soliciting your clients.
Even when an ex-employee has not signed a non-compete agreement, they are bound by common law. And if they held a senior or key position in your firm, that law deems they have a “fiduciary duty” to you as their former employer. As fiduciaries they may not unfairly poach former clients or business opportunities that they know about from the time they worked for you.
All well and good. Can you sit back and relax, confident in knowing that Jack-in-the-corner-office can’t take off tomorrow with your clients?
Setting up shop
Recently there was a surprising decision in an Ontario court. A consulting engineering company (they have asked not to be named) brought an action for up to $3.2 million against two former employees who left and started their own firm.
The case was dismissed, even though the two senior engineers had proceeded to set up their new business in ways that traditionally would be considered off-limits.
They had given only a few weeks notice, though their billings represented about 25% of the company’s gross rev-enues. They had started setting up the new business while they were still working out their notice. They leased office space and on evenings and weekends they and their families spent time renovating their new premises. They advertised for an office assistant, applied for a certificate of authorization to practice, and created a business plan.
Furthermore, in those few days before they left their jobs, the two told some of their closest clients that they were going. They ended up taking with them several major accounts.
The employees apparently had not been asked to sign non-compete agreements, so the court case pivoted on their fiduciary duty. The judge found that the engineers did have a fiduciary duty to their former employer, but that they had not breached that duty.
The case is under appeal, so it’s too early to say whether the decision will stand if it goes to a higher court.
However, the defendants’ lawyer, Sarit Batner, of McCarthy Tetrault in Toronto, believes the case raises important questions for engineers as professionals. “What this case is interesting for, as far as I am concerned, is the intersection between fiduciary law and professionals,” Batner says.
She explains: “Historically if you are a fiduciary -a key or senior employee -then you have certain duties to your former employer, which, even if you don’t have a contract at all, survive your leaving.
“What are those duties? No. 1, you can’t directly solicit the clients of your former employer for a reasonable period of time. And No. 2, you can’t usurp corporate opportunities -those are opportunities that you knew about because of the unique nature of your role when you were at your former employer. Now you’ve left, you shouldn’t be able to capitalize on them.
“That’s all fine and dandy for a scenario where you have a senior vacuum salesman or insurance salesman,” Batner argues, “but professionals are different. An engineer, like a lawyer, like a doctor, actually owes fiduciary duties to the client. Which means a duty of good faith, trust, loyalty, a duty to act in their best interests when you’re working for them.
“So the question is: What happens when you have senior key employees who owe these fiduciary duties to their employer, but they’re also professionals, so they also owe serious and significant duties to their clients?
“I argued that it was perfectly acceptable -and that is the whole professional point -for them to call their clients before they left and tell them they were leaving,” Batner continues. “They were not allowed to directly solicit the clients, and we called a lot of evidence at trial to satisfy the judge that they did not solicit them. They didn’t say, ‘Come with me.’ They didn’t say, ‘Don’t stay here, they can’t do your work.'”
Batner also argued that it was perfectly acceptable for the engineers to “get their ducks in order” before they left their former employee. Setting up shop while working their notice wasn’t “secret planning,” she says, so much as simply acting professionally to get their careers and business in order.
Are contracts the answer?
What, then, is the best solution to ensure that Jack-in-the-corner-office won’t one day take off with a big chunk of the company’s business?
The obvious answer is to draw up non-compete contracts with key employees to restrict their options once they leave.
But it’s not that easy. According to Correna Jones, a lawyer with Fraser Milner Casgrain in Calgary: “The big challenge with ‘non-competes’ is that very often the courts won’t find them enforceable.” (For engineers involved in mergers and acquisitions, it’s a different story.)
Jones says it is well known in legal circles that, “One of the very toughest things for an employment lawyer to do well is to draft an enforceable non-competition provision.”
The reason, Jones suggests, “is that courts are loath to put restraints on trade. And they also don’t want to see people prevented from working. So if we’re talking about employees who are professional engineers with a very particular skill set, an agreement that is too restrictive could actually prevent them from earning a living for a period of time. The courts will almost never uphold a non-compete agreement in that type of situation.”
Judges are more likely to support a non-compete agreement that is specific rather than broad, Jones says. “Very often employers want really overarching, long-term clauses with a broad geographical range that would actually prevent their key people from working for an extended period of time.”
But, she explains, “The courts are going in the direction of a ‘less is more’ philosophy. Therefore, the type of agreement that would be more likely to stand up in court, is one with a narrower restriction. An example, Jones says, would be an agreement covering three months in the city of Waterloo rather than one covering five years in the province of Ontario.
Why it’s important to work things out
Evidently many companies are facing the problem of employees absconding with former clients and confidential information. Between 15-20% of Jones’ employment law business involves these types of conflicts. On the bright side, only about 1 in 10 of these cases ever goes to trial. When the company and the ex-employee start talking, she says, they often come to a financial settlement or other agreement.
For consulting engineers, it can leave a huge hole when senior staff leave because people are a consulting engineering company’s most valuable assets. Engineering might be about technology and physical “things,” but engineering consulting is very much a business and requires working side by side with other human beings.
Ask Naseem Bashir, P. Eng., president of Williams Engineering, in Edmonton: “It depends on what kind of project you’re dealing with and where you are, but fundamentally, the business is all about relationships. The client might have to follow p
rocurement policies, but the reality is that if you as a consulting engineer are liked, you have a somewhat better chance of getting the work.”
As a result, Bashir says, “We spend a significant amount of time building relationships with clients in this industry, and those are one-to-one relationships.”
With so much invested in employees, companies like Williams Engineering are taking steps to ensure their staff know they are working for a progressive firm and so might not be tempted to stray. Firms are competing fiercely for experienced staff these days and Jack-in-the-corner-office probably has his pick of the best firms out there.
Be prepared. If Jack were to leave, not only would you suffer the emotional trauma of having a friend -or someone you thought was a friend -desert you, but also you would have lost a major financial investment.