The Ontario government introduced new legislation that would amend the Employment Standards Act, 2000 to prohibit the use of non-competition clauses or agreements in employment contracts. Generally, these non-competition clauses are prima facie unenforceable as a matter of law. The typical clause prohibits an employee from accepting employment from a competing employer or from starting a competing business for a period of time following the end of employment. The Courts have long held that these clauses violate public policy and will only be enforced in rare occasions, such as when the seller of a business is asked to sign a non-competition agreement by the buyer. In the latter circumstance the prohibition makes sense – it is designed to protect the goodwill of the business that was purchased.
The first reading of Bill 27, Working for Workers’ Act, 2021 was released on October 25, 2021. The Bill will also introduce a requirement for employers with 25 or more employees to institute a written policy for all employees with respect to disconnecting from work.
The Bill defines a non-compete agreement as follows:
“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. (“clause de non-concurrence”)
The Act would then be amended to prohibit an employer from entering into an employment contract or other agreement with an employee that is or that includes a non-compete agreement. However, there is an exception where it is required in the context of a sale of a business. In this sense the amendments appear to recognize the existing jurisprudence.
Notably the amendments would not impact non-solicitation agreements. A non-solicitation agreement does not preclude an employee from accepting employment or otherwise competing. It aims to protect the employer by prohibiting a former employee from “soliciting” clients and customers or employees of the business for a defined period. The Courts have imposed strict tests of reasonableness on non-solicitation clauses but have generally been open to the concept and enforced them as a legitimate contractual device to protect an employer’s legitimate business interests. The potential problem however is that many employers have included both non-solicitation and non-competition clauses in the same agreement. If the Bill passes this introduces considerable risk that all the employer’s restrictive covenants may be deemed to be void.
Key Recommendations for Employers
Employers should consider removing non-competition clauses from their template employment agreements and offer letters. Most employers are aware that non-competition clauses are generally unenforceable. Many employers have left them in as a psychological deterrent when an employee considers leaving to join a competitor. If the Bill is passed, there is risk that employers may lose the benefit of other important terms in their employment contracts. The Courts have demonstrated consistently that where an employment contract contains a term that is contrary to the Employment Standards Act, 2000 the employer may lose the benefit of otherwise enforceable provisions. Instead, employers should focus their efforts on protecting their legitimate business interests using carefully worded and enforceable non-solicitation clauses and confidentiality of business information agreements. Employers can achieve their objectives without the use of non-competition agreements, but it will be critical for employers to ensure that they revisit their agreements considering these legislative developments.
