No More Non-Competes
UPDATED MAY 5, 2022
UPDATED DECEMBER 6, 2021
ORIGINAL POST – NOVEMBER 7, 2021
Part 1: Ontario’s Working for Workers Act, 2021
On October 25, 2021, the Ontario government introduced Bill 27, the Working for Workers Act, 2021 (Act). On December 2, 2021, it became law. The omnibus Act amends various pieces of legislation with respect to provincially-regulated workplaces, including the Employment Standards Act, 2001 (“ESA”). The Act is ambitious in scope, and certainly welcome, as it attempts to address some important legal problems currently facing employees and contractors. However, as I set out below, the Act may have unintended consequences for both workers and employers that could take years to resolve while, at the same time, not dealing with other, pressing issues in employment law today.
In this post, I discuss the new prohibition against non-compete agreements. In a different post, I’ll address some other highlights of the Act.
Non-Compete Agreements Are Prohibited
The Act automatically amends the ESA so that no employer shall enter into an employment contract or other agreement with an employee that is, or that includes, a non-compete agreement (defined as “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”.) Any such non-compete agreement will be void.
Typically, a non-compete (a.k.a. non-competition, or non-comp) agreement or provision provides that an ex-employee will not work for, or start, a business that competes with the former employer for a certain period, and usually—but not always—within a defined geographical location. A non-compete might also apply to an existing employee while they work for the employer to prevent them from working even part-time for a competitor.
There are two exceptions to the prohibition against non-competes:
1. If there is a sale, including a lease, 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 (or lease), the seller becomes an employee of the purchaser.
2. Executives are exempt from the prohibition. The definition of “Executive” under the newly amended ESA is “any person who holds the office of chief executive officer, 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 position.” (See second bullet 2 under ‘Trouble Ahead?’ below for an explanation of this exemption and some future problems.)
There may be one further wrinkle, which involves historical non-competes remaining intact. In a recent case, Parekh v. Shechter, 2022 ONSC 302, the Superior Court was challenged with assessing a non-competition clause that had been signed back in 2020. The Court ruled that since the law was not explicitly retroactive, it could not be read to apply to non-competes signed prior to the date that the law took effect (October 25, 2021). In the Court’s own words, “faced with this express legislative intent to make the ESA amendments applicable as of October 25, 2021, and not earlier, it cannot be said the provisions with respect to the non-compete clause applies to contracts of employment with non-compete clauses entered into before October 25, 2021.” So while most non-competition agreements may be out of bounds, it cannot be assumed that a clause does not apply if it was signed before the law changed.
Commentary
While for many years Ontario courts have been reluctant to enforce non-competes as against employees on common law grounds (except in the sale of business scenario described above—and, even then, the courts are strict about non-compete language), prohibiting them under the ESA sends a clearer and louder signal to everyone affected by them and creates sanctions—or the threat of sanctions—that the common law does not.
Ontario is only the second jurisdiction in North America (California being the first) to legislate away non-competes. This is an important development because it has often been cold comfort for an employee when they are told that a judge likely won’t enforce the non-compete clause in their contract if the case goes to court. These employees could still be on the receiving end of potential “strong-arm” techniques from employers, such as chilling cease and desist letters, and often frivolous, but expensive, lawsuits designed to intimidate them.
Even if employers don’t take drastic enforcement measures, many employees simply don’t want to risk it. They would prefer to avoid working for or starting competitive businesses—often for a year or longer—even though, when working for the competition, they would never breach their actual legal obligations (either in their contract or under the common law, or both) like disclosing trade secrets or customer lists, or actively soliciting the business their former employer’s clients for a period. These are the ex-employee legal obligations that should concern most employers, as opposed to working for a competitor (except in the sale of a business, or a departing executive scenario).
While the courts, when applying the common law, have traditionally favoured fair competition and have viewed non-competes in most employment contracts as “restraints on trade”, these agreements are increasingly viewed by society at large as inhibiting the free movement of labour, and as oppressive to low-income workers who pose no threat to their former employers.
A well-publicized change to the ESA will also help make employers aware that they should not rely on non-competes to protect themselves to their detriment. I still find that too many Ontario employers erroneously believe that the non-competes in their existing employment contracts—many of which were drafted by lawyers in foreign jurisdictions they didn’t even hire, or by local non-employment lawyers decades ago – were always enforced by our courts. They are often surprised when I tell them that I don’t recommend including one in any new contract I am asked to prepare for them. Therefore, they likely took few or no steps to try to properly protect themselves from unfair competition through properly drafted non-solicit and other legitimate contractual provisions.
It is important to note that non-solicit, confidentiality and ownership rights provisions are unaffected by the changes to the law—although that doesn’t mean that any particular provision will necessarily be enforceable by the courts even if they are not automatically void. Experienced legal guidance is recommended.
Trouble Ahead?
Time will tell if the new law creates some challenges for both employees and employers. For example,
- Under s. 132, anyone who contravenes the ESA is guilty of an offence and on conviction is liable to a fine of not more than $50,000 or to imprisonment (of not more than 12 months), or to both, if the person is an individual, and, if the person is a corporation, to a fine of not more than $100,000 (and higher if there have been previous convictions). While this may be an appropriate way of deterring employers from inserting non-competes into new employment contracts and other agreements, it may cause serious problems for employers with non-competes entered into on or after October 25, 2021. These employers may unknowingly, and perhaps undeservingly, be sitting on a ticking time bomb. In many cases, they had no intention of even trying to enforce the non-compete for which they will now be fined. However, as discussed above, pre-October 25, 2021 non-competes may not be in violation of the law (it is not crystal clear based on the vague wording in the Act.) If that is not the case, then the potential damage to employers could be massive. We will have to wait to see how the Courts and the Ontario Labour Relations Board interpret the words “come into force on October 25, 2021”, or for the government to further amend the ESA.
- Is it really unfair to all non-executive employees if a non-compete provision appears in a severance package, freely negotiated between sophisticated parties represented by counsel, where the employer agrees to pay the employee not to work for a competitor for a reasonable period of time? Under the Act, such a provision is now void. This strikes me as unnecessarily harsh, and unfair to employers.
- The ESA only applies to employees and not to independent or dependent contractors, many of whom are gig workers. Unless the Ministry of Labour or the court re-classifies these workers as “employees” for the purposes of the ESA, they may still be bound by the non-competes in their contracts. These may be some of the very people the law is trying to protect—but they are left out.
- Non-compete provisions in employment contracts are now void under the ESA, and not just potentially unenforceable under the common law. If they appear in the same section, or paragraphs as non-solicit and other legitimate employer-protection provisions, then the now illegal non-compete could potentially taint related provisions rendering them unenforceable as well (and we have seen this most recently play out with termination provisions). In other words, because of the way the law has developed regarding termination provisions in employment contracts, we could one day see courts refusing to enforce non-solicitation and other provisions—which actually protect employers from unfair competition by departing employees—because they appear to be intertwined and inseparable from the now illegal non-compete provisions.
What You Must Know
If You’re an Employer
Immediately review all employment contracts, employee agreements and policies with an experienced employment lawyer to determine if you have any non-compete provisions lurking in them that are unrelated to the sale of a business, or which apply to non-executives. Out of an abundance of caution, I recommend reviewing both pre-October 25, 2021 contracts, etc. as well as those from that date and beyond. Note that substance matters and not form. Therefore, don’t assume that a contract doesn’t contain a non-compete just because the title or heading of the provision doesn’t use the words “compete” or “competition”. The documents should then be properly replaced with legal, enforceable provisions that protect you, instead of harming you.
If You’re an Employee (or a Contractor)
While making non-competes illegal is welcome news for employees, it would be wise not to sign any employment contract or employment related agreement without first seeking legal advice. Some employees may agree to provisions that they believe are non-competes, and therefore unenforceable but are actually non-solicit or other types of “restrictive covenants” that may turn out to be perfectly legal. In addition, some employees may believe that they are true Executives (as defined by the Act) and thereby bound by non-competes, when they are not Executives in substance. Also, employees would be wise to review with a lawyer any employment contract, agreement or job offer they signed in the past with their present employer to see if they contain actual non-compete provisions that are now void.
Unfortunately, if you’re an independent or dependent contractor, the non-compete in your contract may not be illegal since the ESA only applies to employees. Contractors need to seek legal advice to determine if they are legally bound by non-competes, or if they are actually employees for legal purposes who could be re-classified and, therefore, entitled to various legal protections under the ESA.
If You’re an Employment Lawyer or Paralegal
Be sure to ask your clients for all employment agreements and policies prior to giving legal advice on hiring and firing to determine if there are illegal non-competes in existence. Furthermore, advise your employer clients to ask you to review all such documents as soon as possible in case they are relied upon without first seeking your advice. In addition, if you were the one who drafted documents containing a non-compete (especially if it was on or after October 25, 2021), quickly advise your client, in writing, of the change to the law and what steps they need to take to avoid liability and to protect their business.
Finally, unless the employee in question is exempt from the prohibition, avoid making a non-compete part of a settlement or severance package.
If you are an employee or employer, I can help you with any contract-related or other workplace issue. I have more than 25 years’ experience as an employment lawyer with satisfied, repeat clients.
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