ABPC: Business Sale, Dismissal and Non-Solicit All In One Case!
In Eyford v. Precision Forensics Inc., 2022 ABPC 242 (Haymour), an employee sold his company and entered into an employment agreement with the buyer to help with the company’s transition. This case deals with a wide variety of employment law issues. Any employment law professors in need of a last-minute fact pattern for Christmas exams should read this one – and no need to thank us!
For brevity, this summary only discusses wrongful termination and the issue surrounding restrictive covenants such as non-competition and non-solicitation clauses. The summary is a bit of a longer one, but worth the read.
The following are the pertinent facts summarized by the Alberta Provincial Court:
- The Plaintiff (“Eyford”) had built a successful fire investigation business. The Defendant (“Precision”) purchased Eyford’s company. As part of the Asset Purchase Agreement (“APA”), Eyford was to stay on as an employee on a fixed term contract from August 3, 2018, to December 31, 2018. During this time, Precision would pay him $70/hour, 40 hours per week. After the fixed term contract expired, Eyford would transition to an independent contractor, where he would invoice Precision $120/hour for services rendered.
- The parties agreed that Precision would purchase the assets of Eyford’s company (including the client list) for $100,000. In addition, Precision would pay Eyford 10% gross revenue of the business for the next three years. The APA also had a non-competition and non-solicitation clause, restricting Eyford from competing with Precision in the Province of Alberta for five years post-sale.
- In a meeting on October 16, 2018, Precision informed Eyford that it was terminating his employment and he was to continue as an independent contractor. Further, his status as an independent contractor would apply retroactively to September. Eyford expressly objected to this, but Precision disregarded his objections and unilaterally applied the changes.
- Eyford continued to work for Precision, but issues began to arise due to Precision’s operational decisions, causing many employees to leave. Uncomfortable with how Precision was doing business, Eyford submitted his resignation in March 2019. The day after submitting his resignation, Eyford sent the following mass email out to all of his contacts, which included the client list that he had sold to Precision:
“As of today, myself and all former Rae-Tech staff, including fire investigators, canine fire investigation team and office staff have left the company.”
- The Email also included Eyford’s phone number and email address. At this time, all of Precision’s fire investigation staff had resigned. Precision alleged that after Eyford sent the Email, they received no further calls from any of the clients on the client list, resulting in their business going dormant for seven months.
- After leaving, Eyford incorporated a federal company to do fire investigations in British Columbia. Eyford sued Precision for wrongful dismissal, as well as damages for breach of contract (unpaid invoices and unpaid 10% revenue for three years). Precision counter-claimed for breach of the restrictive covenants contained in the APA.
Analysis / Conclusion
Eyford alleged that Precision changing him from an employee to an independent contractor amounted to his wrongful termination / constructive dismissal and claimed the entirety of his compensation package for the remainder of the fixed-term employment contract. Precision argued that, as Eyford continued to work after the changes, he consented to the terms and vacated his right to claim damages. Precision also pointed to Eyford’s increased hourly rate ($70 v $120), noting that there could not have been a breach or alteration of an essential term sufficient to amount to constructive dismissal.
The Court found that the change was substantial. While the hourly rate may have increased, Eyford’s compensation changed solely to work that he could invoice, whereas before, he was paid for 40 hours regardless of his billable work. Concerning Eyford’s alleged acquiescence to the change, the Court noted that once he objected to the changes, Precision had two options: terminate Eyford’s employment or allow him to continue working under the agreement’s original terms.
Precision also attempted to argue that, as the termination arose within the first three months of the employment agreement, Eyford was still in his probationary period and thus was not entitled to compensation upon termination. The court disagreed, noting that the APA did not contain any reference to a probationary period:
 … A probationary period typically consists of the first three months of employment with a new employer. If the employment contract expressly provides for a probationary period, employers retain the legal discretion to terminate employees. Such terminations occur without notice only under two situations. Firstly, if the termination occurred in good faith. Secondly, if the termination occurred, in the employer’s opinion, due to the employee’s “unsuitability” for the position hired for. A probationary period only exists as an express term within the employment contract. Otherwise, no such period exists at law. Even if a probationary period existed here, Precision never exercised it as Mr. Pinto stated he never informed Mr. Eyford that he had failed the probationary period. Alternatively, if Precision exercised the probationary period termination, I find it did not do so in good faith or due to unsuitability of Mr. Eyford.
Restrictive Covenants (Non-Solicit / Non-Compete)
The APA contained restrictive covenants (non-solicit / non-compete) for a term of five years, covering the entire province of Alberta. The Court summarized the restrictive covenants as follows:
…refrain from directly or indirectly soliciting any customer of the business, directly or indirectly assisting any person to solicit any customer, having direct or indirect interest or concern in or with any person if the activities of the person consisted of soliciting any customer. Additionally, the restrictive covenant stipulated that the Plaintiff, Mr. Eyford, shall not directly or indirectly induce or attempt to induce any customer to cease or refrain from doing business with the defendants or in any way interfere with the relationship between any customer and the defendant…
Precision argued that the Email breached the above obligations by interfering with existing and prospective clients. While there was no direct evidence that the Email succeeded in soliciting customers, Precision asked the Court to assume that it damaged its fire investigation business, as revenue dropped by 50% over the ensuing two years.
Eyford argued the restrictive covenants arose in the context of an employment relationship, so they should be presumptively unenforceable and Precision should have to prove they were reasonable in temporal and geographical scope. The Court disagreed with Eyford, finding that the APA was, in substance, a commercial agreement, and thus the covenants did not have the same presumption of unenforceability.
Despite being enforceable, the Court found that the Email did not breach the restrictive covenants in the APA. While the wording of the Email was close to amounting to a breach, Precision could not prove that Eyford actually took on previous clients during the five-year period.
The Court’s conclusion on constructive dismissal was not surprising. The evidence convincingly demonstrated that Eyford objected to the change immediately. Further, despite Precision’s attempts to argue otherwise, the change amounted to a substantial financial loss to Eyford over three months.
The conclusion surrounding the Email was also not surprising, but primarily due to Precision’s failure to present any evidence that it caused clients to leave Precision for Eyford. With no evidence, there was no room for the Court to infer that the Email was the catalyst for Precision’s drop in revenue – specifically when considering that all of Precision’s fire investigation staff had resigned and pursued different opportunities.
The analysis concerning the application of restrictive covenants in the employment vs. commercial context is important. The presumption against enforceability in the employment context makes it much more difficult for the party (usually an employer) trying to enforce the clause. In this case, the covenants arose from the commercial context: Precision paid $100,000 in exchange for Eyford’s client list and his agreement not to solicit or compete after the transaction was completed.
Bow River Law provides these regular legal blog articles for the purposes of legal education and research for the public and the legal profession. These articles should be considered general information and not legal advice. If you have a legal problem, you should speak to a lawyer directly.
Michael Hernandez is an employment lawyer at Bow River Law. He is a knowledgeable and skilled lawyer, handling employment law, human rights (discrimination) and labour law matters. Bow River Law is based in Calgary but we are Alberta’s Workforce Lawyers.