As a business owner in Ontario, it is crucial to understand the legal landscape regarding non-compete agreements. Non-compete agreements, also known as non-compete clauses, are contracts that restrict workers from engaging in certain competitive employment activities after leaving a company. These agreements are designed to protect a business's proprietary information.
Non-compete agreements, a type of restrictive covenant, are clauses that “restrict, limit, prohibit, or prevent the actions of someone named in an enforceable agreement.”
They exist to protect the legitimate business interests of employers, particularly in cases where employees have access to:
- Confidential information
- Trade secrets
- Customer relationships
They are intended to prevent employees from leaving their current employer and taking valuable knowledge and expertise to a competitor or to start a competing business of their own.
In this article, we will delve into the intricacies of non-compete agreements and provide valuable insights for navigating them in Ontario.
Understanding Non-Compete Clauses
Non-compete clauses are provisions included in employment contracts or separate agreements that limit an employee's ability to work for a competitor or register a competing business within a certain geographic area and for a specified duration.
These clauses typically outline the prohibited activities and the consequences for violating the agreement. It is important to note that the scope and enforceability of non-compete clauses can vary depending on the jurisdiction and specific circumstances.
For more information about non-competition agreements in Ontario, read this article from the Government of Ontario.
Do Non-compete Agreements Exist in Ontario?
They did and still do.
As of December 2021, Bill 27 of the Employment Standards Act, also known as the Working for Workers Act 2021, is designed to prohibit employers in Ontario from “entering into an employment contract or other agreement with an employee that is, or that includes a non-compete agreement.”
Prior to this, Ontario permitted non-compete agreements. The legislation stipulated that an employee was not to engage in competition with their employer’s business for six months after termination and, if there is a geographic restriction, within 100km of their employer’s workplace.
It's important to note that Bill 27 does not ban the non-compete agreements entered into prior to October 25, 2021.
Furthermore, there are two exceptions to Bill 27.
Exception 1
Employers can draw up non-compete agreements with executives, typically those holding a senior position like president, chief executive officer, chief administrator, chief human resources officer, or even chief corporate development officer.
Exception 2
The clause is also acceptable if during a business sale to ensure that the previous business owner (seller) cannot develop a competing business with their purchaser (buyer) after the sale, where one or both parties can be employees.
Beyond these two exceptions, non-compete agreements no longer exist in Ontario. And if past clauses are enforced, the only way to resolve them is in a court of law between a former employer and employee.
Enforceability of Non-Compete Agreements Entered Into Prior to Bill 27
Non-compete agreements entered into prior to Bill 27 taking effect are enforceable. Some existing court cases prove this.
That said, they are typically settled in court. One such case is Parekh et al v. Schecter et al, 2022 ONSC 302. The case between the two dentists with competing practices located within 5 km of one another was heard by the Ontario Supreme Court of Justice in 2022.
The court eventually ruled in favour of the non-competition clause.
What Does the Ban on Non-Compete Agreements in Ontario Mean for Employers and Employees?
Employers
If employers already have non-compete agreements that were signed prior to Bill 27, these may be enforceable. It’s important to remember that enforceability relies on the clarity of scope and definitions. Without these, enforcing existing restrictive covenants may be challenging.
Employees
Employees should know that as of October 2021, non-compete clauses cannot be included in employment contracts. In the case that an Ontario employee comes across a non-compete clause that was drafted prior to the Act and is let go, they may be entitled to severance pay.
This means that the clause is not enforceable likely because it interferes with the employee’s ability to seek comparable employment and is unreasonably restrictive with regards to time (e.g. years instead of months) or geographical limitations (e.g. out-of-province or out-of-country instead of a specified shorter distance).
In addition, a non-compete clause may not be enforceable if an employee has asked for it to be waived. To prevent legal troubles, a candidate seeking new employment may consider informing their potential employer of a non-compete agreement signed with their previous employer. This process is generally quite smooth if there is a positive employment relationship.
The Act, meant to protect employees, could improve employee retention for employers in being more inclined to create a better workplace if there is a substantive risk that employees can resign to work for a competitor.
Alternatives to Non-Compete Agreements
While non-compete agreements are a common means of protecting a business's interests, there are alternative approaches that may be more suitable in certain situations.
One such alternative is a non-solicitation agreement, which restricts employees from soliciting customers or other employees of the former employer. Non-solicitation agreements are generally viewed as less restrictive than non-compete clauses and may be easier to enforce in Ontario.
Another alternative is a confidentiality agreement, also known as a non-disclosure agreement (NDA). A well-drafted NDA can protect a business's confidential information, trade secrets, and proprietary knowledge without imposing overly restrictive limitations on an employee's future employment opportunities.
Confidentiality agreements can be an effective tool for safeguarding a business's assets and intellectual property while allowing employees to pursue their careers.
Non-Solicitation: Canadian Case Law
Prior to the Act’s ban on non-compete agreements, non-solicitation and non-disclosure agreements (each still currently used) were often imposed in conjunction with a non-compete.
Although it’s important to note, Donaldson Travel Inc. v. Murphy 2016 ONCA 649 heard by the Ontario Court of Appeal indicates the enforceability of the impugned non-solicitation is another thing, especially on the grounds that its use of language is a non-compete clause.
The travel agency appealed the dismissal of its claims against the respondent's departed employee and her new employer.
One of the reasons the appellate judge dismissed Donaldson’s appeal was that the non-solicitation clause in the employment contract or employment agreement:
“In the event of termination or resignation that she will not solicit or accept business from any corporate accounts or customers that are serviced by [the appellant], directly, or indirectly,” was interpreted as a non-compete.
This demonstrates to employers that the mere exclusion of “non-compete” in language does not remove its intention.
What Should Employers Be Aware of When Considering Non-Solicitation Clauses in Employment Contracts?
The other factor affecting the enforceability of a non-solicitation clause is that if it has features of a non-compete clause, it may be interpreted as such.
In that case, for example between a buyer and a seller, a non-compete agreement would need to be reasonably restrictive in scope (e.g. time and/or geographical limitations), clear, and comprehensible if violations are to be considered. According to PRW Law Professional Corporation’s Employment 101,
“In practice, it is not unusual for a restrictive covenant in an employment contract to be titled “non-solicitation” even though the language in the clause prohibits competition generally and is therefore actually a non-competition clause.”
One common way employers can safeguard their business interests is to include a confidentiality clause alongside a non-solicitation.
Also known as a non-disclosure clause, it contractually prohibits employees from the solicitation of former colleagues, customers, and those such as partners, vendors, or suppliers, among others and does not necessarily indicate competition.
In the absence of non-compete clauses in a typical employer-employee relationship, employers may also consider the necessity of the information given to employees.
When doing so, they should consider giving information to the extent that it helps an employee with the responsibilities of their function and restrict giving sensitive information that may be compromising to their business.
Ontario, after California, is the only other North American jurisdiction to do away with non-compete agreements, indicating the province’s relative progressiveness with regard to employment rights and protections.
Without non-competes, employees can freely choose where they want to work with the sets of skills and interests that they have and contribute to employment, create goods and services, and take advantage of the opportunity to build something that might just be the next big thing.
As for employers, the Act gives clarity to help employers make informed decisions.
Non-Compete Agreement: Frequently Asked Questions
Q: What are non-compete agreements?
A: Non-compete agreements are clauses in employment contracts that prevent workers from working for "competitor" companies during or after their current employment. When an employment relationship begins, it can be beneficial to both parties to discuss both employment agreements and non-compete clauses to ensure that all parties are on the same page.
Q: How many workers in the US are required to sign non-compete agreements?
A: Approximately 18% of workers in the US are required to sign non-compete agreements, ranging from financial services executives to janitors and dog walkers.
Q: How do non-compete agreements impact worker mobility and growth?
A: Non-compete agreements make it difficult for underpaid workers to leave for higher-paying jobs, thus restricting their mobility and opportunities for advancement.
Q: Are non-compete agreements difficult to challenge?
A: Yes, non-compete agreements are difficult to challenge, and many underpaid workers lack the resources to do so.
Many federal governments worldwide have proposed rules to ban non-competition agreements, including the rescission of current agreements. The rule aims to curtail the unfair use of non-compete clauses and increase workers' earning potential while reducing racial and gender gaps.
Q: What industries commonly use non-compete agreements?
A: Non-compete agreements are common in industries that deal with proprietary information and intellectual property, aiming to protect trade secrets and the goodwill of the company. In locations where non-competition agreements are valid, it's imperative that the employer actively informs workers if they intend to include one.
Q: What are the key components of a non-compete agreement?
A: A non-compete agreement must have specific parts, including a reasonable duration, scope of prohibited work, geographical limits, and defined compensation or damages in case of violation. These components may vary between different areas and professions.
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