Go right ahead and compete

On November 30, 2021, the provincial government in Ontario amended the Employment Standards Act to prohibit employers from using non-compete agreements. What does this really mean?

What is a non-compete agreement?

It is an agreement between an employer and an employee whereby the employee agrees to not compete with their former employer after their employment ends.  The non-compete agreement can be a stand-alone agreement or, as is usually the case, part of an broader employment contract.

And the legislation bans them?

Yes, the legislation bans employers from using non-compete agreements or non-compete provisions in an employment contract in Ontario. 

Are there exceptions?

Yes, the only exceptions are for executives – typically people in the C-suite like the CEO, CFO, etc.

What’s so bad about a non-compete agreement?

It depends on perspective. Employers often use them to prevent training employees and exposing them to important company information only to have them quit and compete against them.  That said, some employers don’t like them because they can make it harder to recruit talent away from other companies.  Employees typically don’t like them because it means they have fewer options after they leave a job and make them less attractive to potential employers who may want to recruit them.

Was all this necessary?

Generally speaking, clauses like non-competes that restrict employees are unenforceable if the employer can't prove to the court that they are reasonably necessary to protect their interests, which they also must prove to be reasonable and legitimate. The employer also has to show that no other, less restrictive, measures would be sufficient to protect themselves.  Often, employers do have legitimate interests that ought to be, and can only be, protected via a non-compete clause. The courts are well-versed in making this assessment.

So, ex-employees were already protected from non-compete clauses that were too far-reaching or unnecessary. In that respect, the Ontario legislative ban is redundant. That said, ex-employees often had to deal with costly and slow litigation in order to bring the matter to a head.

What about outside Ontario?

The legislation applies to provincially regulated employees in Ontario.  Elsewhere, the common law still applies in that a non-compete agreement is permitted but must withstand the scrutiny of the court in order to be enforceable.

I’m an employer.  What else can I do?

There are still plenty of ways for employers to protect legitimate interests.  Non-solicitation clauses, if reasonable in scope, and confidentiality clauses can still be used, and both can survive the end of an employment relationship.  The key is to put some thought into it in advance with a good lawyer and draft a contract that is appropriate and clear.  Employers should also work with their HR, internal communications and legal teams to ensure the manner in which employment contracts are offered is fair, transparent and allows the potential employee the chance to truly understand what is being offered.

Advice

This is a general description of the new law and its impact.  It’s not actual legal advice for you.  If you want to talk about your particular situation, get in touch!