Does A Wrongful Dismissal Relieve An Employee From Restrictive Covenants?

There are generally two types of "wrongful dismissal". The first type involves cases where an employer, believing it has cause for termination without notice, dismisses an employee for cause only to have a court subsequently decide that there were insufficient grounds to establish just cause for termination. In that sense, the dismissal was "wrongful" because notice of termination without cause should have been given.

The second type of wrongful dismissal involves cases where an employer fails to give sufficient notice, or pay in lieu of notice, for a termination of employment without cause. The "wrongful" act is the employer's failure to give proper notice of termination, contrary to an express or an implied term of the employment contract.

The employee's remedy in both types of wrongful dismissal is to seek compensation for the employer's breach by bringing an action for payment in lieu of notice.

Impact of Wrongful Dismissal on Restrictive Covenants

Are there other consequences to an employer, however, for a wrongful dismissal? For example, does that breach of contract by the employer entitle the employee to ignore employment contract provisions (known as "restrictive covenants") which restrict the employee's right to compete with, or to solicit customers from, his former employer? According to a recent decision of the Alberta Court of Appeal, if the breach signals a clear intention by the employer not to be bound by the employment contract (i.e. a repudiation of the contract), and if the employee accepts that repudiation, then the answer to that question is "yes". When an employee is wrongfully dismissed without cause or proper notice, the employer cannot enforce a restrictive covenant in a contract, against the employee: Globex Foreign Exchange Corporation v. Kelcher, 2011 A.B.C.A. 240.

The decision in Globex is based upon an old English House of Lords decision in a case known as General Billposting Co. Ltd. v. Atkinson, [1909] A.C. 118, which held that the wrongful termination of the employment contract by the employer rendered the restrictive covenants in the employment contract, unenforceable against the employee. Part of the rationale behind that principle is that it would be morally unjust to permit an employer to benefit from restrictive covenants which may prevent its former employee from competing with, or soliciting customers from, the employer after it has acted wrongfully by refusing to honour its side of the bargain. If the...