Non-competition agreements (or “non-competes”) have long been viewed as a great way for business owners to prohibit (or at least deter) former employees from taking confidential information, and using it to unfairly compete against it as a former employer. In Ontario, employment law generally permits employers to require employees to agree to non-compete obligations to restrict their activities after their employment ends – but only if certain legal standards are met.
What is a Non-Compete Agreement?
A non-compete agreement is basically contract usually between an employer and employee, in which the employee agrees not to enter into or start a similar business that would compete with his or her employer’s business for a certain period of time and/or within a certain geographic location.
While courts in Canadian provinces, including Ontario, will generally uphold a non-compete agreement that follows basic legal requirements (see below), their usual preference is to set aside a non-compete agreement when given the opportunity. That is, when a non-compete agreement is “unreasonable” (overly broad and vague), the courts will usually interpret the non-compete in the employee’s favour, mainly because employees are presumed to be in a weaker bargaining position compared to the employer and want to prevent employers from taking unfair advantage.
That being said, the courts will enforce non-compete agreements under certain conditions. For example, the courts generally require employers to prove forcing an employee to comply with a non-compete is necessary to protect the employer’s legitimate business interest, such as their confidential information, customer base or goodwill. In addition, these states require non-competes to be reasonably limited in:
– Time: courts in Ontario have held that non-compete agreements for one or two years are reasonable time (this is the usual cut-off time);
– Geography: the smaller the location the employee is prohibited from competing against the employer, the better. So, a “reasonable geographic scope” could, for example, include a former employee’s territory during her employment, a 10-kilometre radius from the employer’s operating area, or the employer’s current clients within a limited geographic area. As such, the courts held typically that a worldwide or national geographic restriction is too broad to enforce (unless it can be justified by special circumstances require). In other words, a Canada-wide non-compete agreement would be unreasonable where the employer only did business within Toronto; and
– Activities Prohibited: the more limited the type of activities the employee is prohibited from doing, the more likely it will be found enforceable. So, in general, a non-compete agreement that prohibits a former employee from joining or starting a competing company that “provides the same services” as the former employer is likely unenforceable, since it is simply prevents the employee from using their skills to earn a livelihood by stifling all possible competition, rather than protecting a unique business interest.
Put simply, the courts want to see that an employer’s requirements in the non-compete agreement are no more restrictive on the employee’s job activities than necessary.
Competing Policy Interests in Non-Compete Agreements
As noted above, while allowing employers ability to protect proprietary interests is an important objective, the courts have also tried to balance this with the important objective of allowing employees to use their knowledge, skills and experience to earn a living – even if that means competing with their former employer. As a result, the courts have overtime generally shifted their priorities to the latter objective – allowing employees to freely compete with their employer after a termination of employment, except in specific circumstances – and therefore cut back on the effectiveness of non-compete agreements by limiting the scope of those agreements.
Most courts in Ontario will only enforce non-compete agreements if they are “reasonable” and “necessary”. This will always be a fact-specific determination depending on a court’s understanding of each case. As such, employers and employees should understand the restrictive covenant laws under employment law when they intend to business in Ontario. As many cases illustrate, while they are generally hard for employers to enforce when challenged in court, there are certain circumstances where the courts will actually uphold a non-compete agreement that effectively prevents an employee from competing with their former employer.
Non-Compete Agreements for Employers
Employers operating in Ontario should revisit their non-compete agreements, particularly if they are using the same template agreement for all of their employees or one that may be outdated in view of constantly changing employment law. While one employer’s non-compete agreement may be deemed lawful in one instance (depending on many factors, such as its language, the employee’s history and employer’s business), the same may potentially expose a different employer to liability in a wrongful dismissal claim or severance package negotiation with a departing employee. As such, employers should consider working closely with an experienced Toronto employment lawyer to ensure that a non-compete agreement protects its business interests, rather than creating employment disputes.
It is also important for employers to speak with an employment lawyer to understand whether other types of post-employment restrictions on employees for their specific business, such as a valid non-solicitation or confidentiality agreement, as a reasonable alternative. In fact, the general consensus of the courts under Ontario employment law is that an agreement prohibiting former employees from soliciting the employer’s employees, customers or suppliers (non-solicitation agreement), or an agreement prohibiting disclosure of the employer’s confidential information (confidentiality agreement or non-disclosure agreement) is more likely to be enforced. In some instances, non-solicitation agreements and confidentiality agreements may actually be equally effective as non-compete agreement in protecting the employers from unfair competition.
If you are an employer who wants to protect itself from unfair competition from a former employee, it is prudent to consult with experienced Toronto employment lawyer, such as Bune Law, to get experienced legal advice suitable to your particular needs.
Contact Employment Lawyer
Despite a common misconception, employees are not free to simply ignore a non-compete agreement signed with their former employer. In Ontario employment law, whether a non-compete agreement is enforceable will always depend on the law a court’s view of the language of the agreement and what evidence the employer provides to the court about its legality and whether the employee failed to comply with his or her obligations. Generally, the courts will only enforce non-compete agreements if they are “reasonable” (that is, fair) in scope and term.
Whether you are an employee who is asked to sign a non-compete agreement as part of a new employment contract or in a severance package, or an employer looking to protect your business by asking an employee to agree to (or comply with) a non-compete agreement – feel free to reach out to Bune Law at 647-822-5492 for guidance from an experienced employment lawyer.
Disclaimer: The content on this website and blog is not legal advice or legal opinion of any kind, and is only general information. It is in no way particular to your individual case and should not be relied upon in any way. The outcome of a legal matter depends on its unique circumstances, and prior successes are not indicative of future results. No portion or use of this website or blog will establish a lawyer-client relationship with the author, this law firm or any related party. Should you require legal advice for your particular situation, please fill out the form below, or call 647-822-5492, to request an initial consultation.
Toronto Employment Lawyer | Wrongful Dismissal Lawyer | Severance Pay Lawyer | Employment Lawyer Toronto