Non-Compete Clauses Officially a Hard No (For Most Employment Agreements)

Since the Ontario Court of Appeal’s pivotal decision in Lyons v. Multari, 2000 CanLII 16851 (ON CA) over 20 years ago, the general consensus of the employment bar is that non-compete clauses are difficult to enforce where a non-solicitation clause would adequately protect the employer’s interest.

Despite this established law, many of us have still included these clauses in employment agreements over the years to protect an employer’s proprietary interest while narrowing the non-compete clause as much as possible with respect to temporal and spatial restrictions.  The point of advice to clients over the last 20 years was to draft a clause which looks to protect the proprietary part of the business in the most minimal way possible, which was essential to protect and not restrict an employee’s ability to compete fairly in the marketplace.

Courts have been reluctant to enforce non-compete clauses in this century because the general rule is that non-competition covenants are void since these clauses are “restraints in trade”. In plain language, the effect of these clauses is to impede an employee’s ability to go out and find another comparable position with a competitor following the end of the employment relationship. 

It is with this context for the last twenty years that the Ontario government took the bold step to outright ban non-compete clauses (as defined) in employment agreements by passing the Working for Workers Act, 2021 (“Bill 27”) on November 30, 2021.  Bill 27 amends the Employment Standards Act, 2000 (“ESA”).  Section 67.2(1) of Bill 27 provides “that no employer shall enter into an employment contract or other agreement with an employee that is, or that includes a non-compete agreement.” On a plain reading of this section, it would apply to non-compete clauses in employment agreements or in stand alone confidentiality agreements as part of the employment relationship.  What is not clear is whether this section applies to non-compete clauses typically found in share purchase agreements that employees typically sign when awarded equity in a company. 

There are two notable exceptions to this ban of non-compete clauses: (1) as the result of the sale of a business, the seller is subject to a non-compete clause as part of the sale transaction and subsequently becomes an employee of the purchaser; and (2) “executives” as defined by the Bill 27.  The legislation defines “executives” as “any person who holds the office of chief executive offer, president, chief administrative officer, chief operating officer, chief financial officer, chief information officer, chief legal officer, chief human resources officer or chief corporate development officer, or holds any other chief executive positions.”  It seems inevitable there will be litigation down the road as to what positions constitute “any other chief execution positions”.  The executive exception as drafted glaringly omits any specific type of managerial or director of sales role.  It seems focused on the most senior roles in a company.

So what does this mean for employers? First and foremost, the prohibition is specifically against clauses that attempt to prevent an employee from working for a competitor after the employment relationships ends. The legislation does not appear to restrict the use of non-compete clauses during employment. Practically speaking, the amendments provide some clarity to judges and the employment bar to continue to use non-compete clauses sparingly in the employment contact.  Instead, employers need to focus on having their employees sign comprehensive non-solicitation clauses to protect a companies business and its customers, and when relevant, continue to use non-compete clauses in separate stand alone commercial agreements with employees.

As the Ontario government is the first to introduce legislation of this kind in Canada, it will be interesting to see how the rest of the country (and even other common law jurisdictions) reacts to this ground-breaking change in the law. We will continue to advise you of any legislative developments, as it remains to be seen whether regulations may be introduced to narrow the scope of these amendments.

For now, employers who use these clauses are best advised to have them reviewed and assessed given these changes.