Non-compete agreement – Ontario, Canada
LexNovum Lawyers
04/04/2022
On December 2, 2021, Ontario’s Bill 27, Working for Workers Act, 2021 [PDF], received Royal Assent, making Ontario the first jurisdiction in Canada to ban non-competition agreements between employers and employees under the Employment Standards Act, 2000 (Ontario).
According to an October 25, 2021, Ontario government press release, this new statutory prohibition is intended to “help workers in Ontario advance their careers and earn more money” and “give the province a competitive advantage in attracting global talent”, while also ensuring that [e]mployers [will] still be able to protect their intellectual property through narrower clauses such as non-solicitation covenants and contractual confidentiality provisions. “COVID-19 has changed the way we work, leaving too many people behind, struggling to put food on the table and make ends meet for their families,” said Minister McNaughton. “Our government is working for workers. To do so, we must act swiftly and decisively to put workers in the driver’s seat and begin rebalancing the scales. Today’s proposed legislation shows Ontario is ready to lead the way into the workplaces of tomorrow, and create the conditions that will make talented, innovative people want to work in our great province.”
Overview
Effective October 25, 2021 employers are prohibited from entering into employment contracts or other agreements with an employee that include a non-compete agreement.
“Non-compete agreement” means an agreement, or any part of an agreement, between an employer and an employee that prohibits the employee from engaging in any business, work, occupation, profession, project or other activity that is in competition with the employer’s business after the employment relationship between the employee and the employer ends.
Before, during and after employment relationship
Entering into non-compete agreements is prohibited before the employment relationship begins, during the employment relationship and after it ends.
Examples of prohibited non-compete agreements include non-compete agreements entered into by:
- A potential employer and an applicant for employment before an employment relationship begins
- An employee with their employer during the employment relationship
- A former employee and their former employer after the end of the employment relationship
Exceptions
There are two exceptions to non-compete agreements being prohibited under the ESA:
The first exception applies where all the following occur:
- There is a sale or lease of a business or a part of a business that is operated as a sole proprietorship or a partnership
- Immediately following the sale, the seller becomes an employee of the purchaser
- As part of the sale, the purchaser and seller enter into an agreement that prohibits the seller from engaging in any business, work, occupation, profession, project or other activity that is in competition with the purchaser’s business after the sale.
The second exception applies to executives:
- The ESA does not prohibit employers from entering into non-compete agreements with executives. An executive is any person who holds the office of:
- Chief executive officer
- President
- Chief administrative officer
- Chief operating officer
- Chief financial officer
- Chief information officer
- Chief legal officer
- Chief human resources officer
- Chief corporate development officer
- Any other chief executive position
In practice
The new statutory prohibition is consistent with the longstanding common law presumption that a non-competition covenant in an employment agreement was contrary to public policy and generally unenforceable. Ontario courts have long differentiated between commercial (e.g., sale of a business) and employment contexts concerning non-competition provisions, and have long taken a much less tolerant view of non-competition covenants in employment agreements. For example, Ontario courts would rarely enforce a non-competition covenant against a mere employee (i.e., someone who is not a senior executive) and especially where a confidentiality or non-solicitation covenant would have adequately protected the employer’s interests. In commercial agreements (e.g., between vendors and purchasers), the courts were, and presumably will continue to be, more willing to enforce reasonable non-competition covenants. Manifestly, there is a lower likelihood of a power imbalance existing between the parties in such a context as compared to the employment context.
Effectiveness
The Act provides that the prohibition against non-compete agreements is deemed to be in force effective October 25, 2021. The Act does not indicate whether the prohibition applies to non-compete clauses entered into prior to the prohibition’s effective date of October 25, 2021. This question was recently answered, however, by the Ontario Superior Court of Justice in Parekh et al v. Schecter et al, 2022 ONSC 302:
[47] Faced with this express legislative intent to make the ESA amendments applicable as of October 25, 2021, and not earlier, it cannot be said the provisions with respect to the non-compete clause applies to contracts of employment with non-compete clauses entered into before October 25, 2021.
[48] At most, and in respect of this case, the new ESA provisions confirms the public policy against restraint of trade, which has already been accepted in the common law.
The prohibition only applies to non-competition agreements entered into after October 25, 2021. Thus, while a non-competition agreement may be challenged under common law, non-competition agreements entered into before October 25, 2021 are not captured under the ESA.
Source:
https://www.ontario.ca/document/your-guide-employment-standards-act-0/non-compete-agreements
Executor: LexNovum Lawyers
