Business Venture Blog
This is where we post about business, ventures, law, and business venture law.
Anything interesting, really.
Anything interesting, really.
Business Venture Blog
Employees and Start-up Companies
Finding the best employees is fundamental to start-up companies. Bryce Tingle has noted in his book Start-up and Growth Companies in Canada - A Guide to Business and Legal Practice that "a new company's success is primarily a function of future managerial decisions, unlike more established companies where most income is derived from existing businesses."  Employees in a start-up company will see significant change in the nature and character of their work as the company progresses.  For example, a small food-preparation start-up might begin with two founders. They may have limited tech knowledge and may bring on an individual with coding knowledge. That individual may later be required for more of a business development practice as they become more familiar with the running of the business. A constant movement of various people in the firm as responsibilities change will have an effect on how an employment agreement is written.
Some general considerations of employment with start-up companies:
1. Keeping the description of job duties of an employee in a contract of employment as general as possible can help avoid issues down the road with respect to changes in job duties as hinted above. It can be mentioned that due to the corporation's expected growth, responsibilities of an employee will change from time to time.  Unanticipated changes in employment responsibilities can constitute constructive dismissal, and because changes are reasonably foreseeable in a growth company, a contract clearly providing for an employer's power to change an employee's position from time to time is important. 
2. The goal for a start-up should always be "no surprises".  To avoid issues down the road including an "integration clause" stating that the documents represent the entire agreement regarding the employment relationship, and terms cannot be modified except in writing executed by both parties is important. 
3. As in any contract, consideration is required. Canadian courts have viewed arrangements where an employee signs their formal employment agreement on their first day of work as unenforceable. This can happen where that person was first sent an informal "offer letter", or general job description, and later formally signed at work.  Rather, an employment agreement entered into as a condition of a prospective employee being offered employment is enforceable. The consideration is the employment. 
4. On a general level, Canadian courts are strongly sided towards employees rather than companies. This might be more intuitive in the sense of big multi-national corporations "taking advantage of the little guy". However, for a start-up, being sued by an employee can be heavily detrimental, if not crippling to, a company's survival. It is vital to ensure that employee agreements are well-written and thought out. The BLG Business Venture Clinic can be a useful service for early start-ups considering and contemplating the drafting of employee agreements, and various clauses within such as rights of first refusal, piggyback rights, shotgun provisions and others.
Nielsen Beatty is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.
 Bryce Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, Third Edition, LexisNexis Canada Inc. (2018) at 126.
 Ibid at 127.
 Ferdinandusz v. Global Driver Services Inc.  O.J. No. 4225, 5 C.C.E.L. (3d) 248 (Ont. Gen. Div.).
 Tingle, Start-up and Growth Companies in Canada at 127.
 Ibid at 128.
 Buaron v. Acuityads Inc.,  O.J. No. 5045 (Ont. S.C.J.).
Startup Pitfalls in Employment Law
Hiring your first employees is a major step for a young business, one that comes with a new set of new legal challenges and risks. This blog will discuss some of the major legal pitfalls in hiring. Note that this post doesn’t discuss the contractor/employee distinction (which is also very important) because that was covered in a previous post by Sunny Uppal on April 21, 2019.
Don’t Try This at Home
Employment law did not develop with small startups in mind. It emerged at a time when low-paid industrial workers needed protection from massive industrial employers, and it shows. Employment law generally assumes that employers have the upper hand in bargaining power and fairly deep pockets.
For startups, this means that you should always obtain legal information or advice before proceeding with your first hiring. Attempting to draft your own employment agreements (or not using written agreements at all) is walking blindfolded into a minefield of legal issues. Even lawyers have difficulty drafting some provisions to be enforceable, but they can at least assess risks and steer away from the more dangerous areas.
Get it in Writing from Day One
Handshake deals are common in the business world, and while lawyers are generally wary of unwritten agreements that is doubly true in the employment context. The problem is, absent a written agreement, a contract is “deemed” to arise regardless of the parties’ intentions and the terms of that contract will be decided by statute or by the courts. As an employer, these deemed contracts will rarely be preferable to a written agreement and can create uncertainty and risk.
The other issue with these unwritten agreements is that any later written arrangement is treated not as a new contract, but as a modification of the existing contract that arose when the relationship began. This creates a problem of consideration: the legal concept that if a contract is to be enforced in court, it must be an exchange of meaningful value between parties. The problem in this case is that the later agreement can be treated as a modification of the old contract, so if nothing new is being offered then the court will use to the old contract instead. Consider the following example: Jessica hires her friend Dave to do some bookkeeping for her without a written agreement. As the business grows, Jessica begins to look for financing but investors want to see papered employment agreements, so she asks Dave to formalize their relationship in writing at the same pay, hours, benefits, etc. In this scenario, the second contract is likely void for lack of consideration since Dave is providing a benefit to Jessica (a written contract for her investors) but receiving nothing in return except for the benefits he already receives under the old contract. This means their relationship is still governed by the unwritten contract, including the terms that arise by operation of statute or common law. It is important to get employment agreements in writing from the start, to avoid unwanted terms.
All That is Written is not Gold
While it is important to get employment agreements in writing, doing so doesn’t provide complete assurance that the written terms will be enforced. A major area of concern for startups is the possibility that an employee will start a competing business: startups often have low barriers to competition, so it is important to set up proper protections that will be enforceable.
A common tool to this in is the non-competition clause, or “restrictive covenant”. The idea is to prevent a former employee from becoming a competitor by setting up a competing business or going to work for a rival, using the experience they gained as an employee against the employer. While common, non-competition clauses are a tricky area of law. The Supreme Court has been reluctant to enforce such clauses on the grounds that they make it difficult for employees to find work in their area of expertise, which imposes a burden on their ability to earn a living. This means that non-competition clauses require careful drafting, and even then it is wise not to rely on them entirely.
Another way to protect yourself from competing against a former employee is to include strong intellectual property provisions into the employment contract that prevent the employee from wielding the knowledge they gained during their employment against you. Either way, seeking the proper legal assistance is critical.
Kevin Lee is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.
 Employment Standards Code, RSA 2000, c E-9; Kent v Bell, (1949) 4 DLR 561.
 Greater Fredericton Airport Authority v NAV Canada, 2008 NBCA 28.
 J.G. Collins Insurance Agencies v Elsley, (1978) 2 SCR 916.
Contractor or Employee?
In a start-up, it is often necessary to hire workers. To avoid legal obligations to employees, entrepreneurs will often characterize these workers as independent contractors. However, defining a worker as an independent contractor does not automatically make that worker an independent contractor. Rather, whether a worker is an independent contractor or employee is determined by examining the substance of the relationship between the worker and employer. There are various common-law tests available to examine the substance of this relationship. Importantly, no particular common-law tests is determinative about the legal status of the worker. Regardless, this blog will provide a brief overview of the primary common-law test used by courts, the fourfold test.
In Montreal v Montreal Locomotive Works Ltd et al, (“Montreal Locomotive”), the House of Lords articulated the fourfold test. In summary, the fourfold test requires examining whether (1) the alleged employer is exerting control, or has the power to exert control, over the worker, (2) whether the worker owns the tools of his trade, (3) whether the worker has the chance of profit, and (4) whether the employer has the risk of loss.
Control is the right to give orders to a worker regarding where, when and how work is performed. Workers required to follow such orders are more likely to be employees. Independent contractors typically determine the hours, place and method of work for themselves.
Examples of control include the employer’s right to:
Ownership of Tools
A worker who owns and supplies the tools, materials, licenses and contacts required to perform agreed work is more likely to be conducting his own business and be considered an independent contractor. A worker who is supplied with these things by an employer is more likely to be part of the employer’s business and considered an employee.
”Tools” is a catchall term used to describe a wide variety of items and resources required to perform work, including:
Chance of Profit and Risk of Loss
Exposure to profit or loss on a work contract is indicative of an independent contractor. As a business owner, an independent contractor makes expenditures on equipment, workers, advertising, licenses, or other resources. Having contracted for a particular volume or quality of work, his return is affected by how efficiently he can meet that volume or quality.
In contrast, employees typically invest only their time in performing work. They are usually paid wages or salary and do not run a risk of loss if work is not performed efficiently. Likewise, they are typically not entitled to share in increased profits resulting from their work.
In conclusion, entrepreneurs must be careful whenever retaining a worker. Although the entrepreneur may be under the impression, they are retaining the services of an independent contractor, they may in fact have hired a new employee.
Sunny Uppal is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary.
 Kaszuba v. Salvation Army Sheltered Workshop (1983), 83 C.L.L.C. 14,032 (Ont. Div. Ct.)
 671122 Onatrio Ltd v Sagaz Industries Canada Inc, 2001 SCC 59 at para 46 [Sagaz Industries].
  1 DLR 161.
 Montreal (City) v Montreal Locomotive Works Ltd (1946),  1 DLR 161 at p 169 [Montreal Locomotive].
What are they?
A non-compete clause is a provision designed to limit a former employee’s ability to work for a competitor or open a competing business. Non-compete provisions are sometimes included in employment contracts, but they can also form a standalone agreement.
Non-compete clauses are very common, especially among start-up companies. After all, the last thing a company wants when an employee resigns or is terminated is for that employee to launch a competing business or head straight to the nearest competitor. Employees may have intimate knowledge of their former employer’s trade secrets, operations and business plans, and may have gained access over the course of their employment to valuable information relating to customers, clients, new products and marketing strategies.
Are they enforceable?
Despite their popularity, non-compete clauses can be difficult to enforce. From a public policy perspective, the courts want to ensure that individuals are not unfairly prevented from earning a living. This has resulted in courts frequently striking down non-compete provisions that are deemed to be “an unreasonable restraint on trade”.
However, there are a number of surrounding factors that courts consider in assessing the reasonableness and validity of a non-compete clause. Understanding these considerations can help employers craft effective non-compete provisions that are as minimally restrictive as possible. To design a non-compete that will protect the company and withstand a legal challenge, consider the recommendations below.
Limit the scope
The more limited a non-compete is with respect to duration and geographic scope, the more likely courts are to enforce it. In Kohler Canada v Porter, the provision in question restricted a manager from competing anywhere in North America for one year after termination of employment “in a line of business…in which the employee worked”. The court struck down the provision for being too broad.
Moreover, the geographic scope should be clearly and unambiguously defined. In Shafron v KRG Insurance Brokers (Western) Inc., the court refused to uphold a non-compete clause they deemed unenforceable due to ambiguity. The contract in question sought to prevent a former employee from working anywhere in “the Metropolitan City of Vancouver”, which is not a legally recognized geographic area. As a consequence, the court held that the entire agreement was invalid.
Employers should also embed in the agreement itself the rationale for the geographic and temporal scope. Courts may consider such factors as the duration of the employee’s tenure, the size of the market in a geographic region, and the nature of the information to which the employee had access or how closely they worked with clients. Being transparent about the factors that inform the scope of the non-compete can help a court assess whether or not it is reasonable.
Further, a company may choose to tailor a non-compete clause in terms of the specific jobs its employee will be prevented from taking, or the competitors they will be prevented from joining for a period following the termination of their employment. This way, the company can protect itself in the areas in which it is most vulnerable, without unduly hampering the employee’s ability to find subsequent employment. This means that non-compete clauses must be specific to the employee, having regard for the roles and competitors where that employee most poses a risk to the company.
Don’t impose non-compete agreements on everyone
While it may be tempting to bind every employee to a non-compete agreement, such indiscriminate application can actually weaken the protection afforded by such provisions. If every employee is required to sign a non-compete agreement regardless of how tangential their role is to the company’s main business, the courts may view this as demonstrating a company’s unreasonableness. In assessing whether a non-compete clause is necessary or reasonable, courts will consider whether a departing employee had influence over clients or customers and how much damage the employee could do in the same market as the company. A receptionist leaving the company likely doesn’t pose the same risk that a software engineer or salesperson does. A company’s use of non-compete agreements should reflect that.
Consider a non-solicitation agreement instead
A non-solicitation agreement can be used to prevent a departing employee from poaching the company’s clients, investors, suppliers and other employees. While non-solicitation agreements can also be struck down if they are too broad, they are more likely to be enforceable than are non-compete agreements. Non-solicitation agreements may be as (or more) effective as non-compete agreements at protecting a company. A salesperson leaving to join a competitor’s team can do far less damage if they are not allowed to take clients with them. Although non-solicitation clauses should be customized just as non-competes are too avoid being struck down for over breadth, there are a few good rules of thumb. First, limit them to one year or less. Second, the clause should be drafted to prevent an employee from soliciting only those individuals with whom they developed a relationship over the course of their employment. Attempting to prevent the employee from contacting anyone the company does business with has greater potential to be viewed as unreasonable, particularly in smaller markets.
Melanie Bowman is a member of the BLG Business Venture Clinic, and is a 2rd year student at the Faculty of Law, University of Calgary.
 Bryce C. Tingle, Start-up and Growth Companies in Canada 3rd ed (LexisNexis Canada Inc., 2018), at 131.
 Kohler Canada Co. v Porter  OJ No.2418, 26 BLR (3d) 24 (Ont SCJ).
 Shafron v KRG Insurance Brokers (Western) Inc.,2009 SCC 6,  1 SCR 157.
 Supra, note 1 at 132.
 Lisa Stam, “Is My Employee’s Non-Compete Agreement Enforceable?” (21 February 2018), online (blog): Employment and Human Rights Law in Canada < https://www.canadaemploymenthumanrightslaw.com/2018/02/employees-non-compete-agreement-enforceable/>
 Supra, note 1, at 132.
 Supra, note 5.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.