No More Employee Non-Competition Clauses in Ontario?
Last month, the Ontario government introduced “Bill 27, Working for Workers Act, 2021.” Among other things, the proposed law would amend the Employment Standards Act, 2000 (“ESA“) to specifically prohibit employers from “entering into” an employment contract (or other agreement) with an employee that is or includes a non-compete requirement. Further, this legal change to the ESA would make it clear that any non-compete agreement entered into by an employer and employee in violation of the new rule will be deemed legally invalid and unenforceable.
What is a Non-Competition Agreement?
A non-competition agreement is a type of restrictive covenant (legal promise) in employment contracts that attempts to prevent a departing employee from competing with an employer, regardless of the cause for departure (e.g., resignation, termination for just cause, and so on). The aim of the employer is to prevent the employee from leveraging their operational knowledge of the company, and individual goodwill developed from relationships with customers, to engage in direct competition – whether by joining a competitor or starting a competing company.
Generally, the courts in Ontario have been very reluctant to enforce a non-competition agreement. Specifically, except in rare circumstances, the courts have usually refused to spurned employers from forcing departing employees from leaving a new job to join a competitor on the basis that they are against the public interest. The reason? Employees should not be prevented from earning a livelihood, even if that means joining a competitor. As such, most courts refused to enforce non-competition agreements if a simple non-solicitation clause would protect the employer’s interest, such as not soliciting clients or customers.
In the rare instances where the courts permitted employers to rely on an employee’s non-competition agreement, they had to pass a high legal standard to establish it was reasonable and justifiable, especially in terms of the length of time, geographic scope and/or nature of activities it prohibits. Put simply, the courts want to see that an employer’s requirements in a non-compete agreement are overly restrictive on an employee’s job activities than necessary.
What’s Deal With the Non-Competition Prohibition Being Proposed?
PART XV.1
NON–COMPETE AGREEMENTS
Prohibition
67.2 (1) No employer shall enter into an employment contract or other agreement with an employee that is, or that includes,
a non–compete agreement.
Same
(2) For greater certainty, subsection 5 (1) applies and if an employer contravenes subsection (1), the non–compete agreement
is void.
Exception — sale, etc., of business
(3) If there is a sale of a business or a part of a business and, as a 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 and, immediately following the sale, the seller becomes an
employee of the purchaser, subsection (1) does not apply with respect to that 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 end.
Based on the language of the legal change being proposed in the ESA, the ban on non-competition agreements would apply only after October 25, 2021, as opposed to all previously existing non-competition agreements. However, an important exception so far set out in the proposed law (with likely many more to be proposed in future regulations) is a non-competition agreement that is part of a sale of a business. Specifically, this means the ban would not apply to prohibit a purchaser of a business to require a seller who is kept on (usually for transition purposes) to comply with a non-competition agreement
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Given that non-competition agreements are quite frequent in Ontario workplaces, employers should carefully review their employment contracts and consider the necessity of including a no-competition requirement in employment contracts, in case this prohibition takes effect.
If you are an employer or employee, please contact Bune Law at 647-822-5492 arrange a consultation with an employment lawyer in the Toronto area, so that we can discuss your specific employment matter in detail, explain employment law as it applies to your situation, and then determine whether you need our assistance and how we can help.
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