Restricting restrictive covenants

Ontario has proposed a general prohibition on employers having non-compete agreements with employees

Restricting restrictive covenants

Neill May is a partner at Goodmans LLP in Toronto focusing on securities law, with an emphasis on M&A and corporate finance. The opinions expressed in this article are those of the author alone.

The term “non-compete” has always conjured painful memories for me of my convincing ineptitude at most sports. Many of my peers had fierce or inspiring nicknames reflecting the characteristics of their hockey-playing. I was called “the Shepherd,” and assume that holding my stick like a staff and surveying the flock from a distance was not as useful as one might hope. Non-competes, in their more conventional legal meaning — referring to agreements that prohibit parties from engaging in businesses characterized as competitive — have been more generally controversial, because of their impact and uncertainty about their enforceability.

In commercial practice, non-competition agreements most frequently arise in two contexts: employment agreements and the sale of a business. The employment context is the more controversial, and uncertain. Enforcement may well have the effect of preventing an individual’s gainful engagement in productive activity, offending public policy considerations that weigh in favour of maximizing employment and personal fulfillment — not to mention the typical disparity in resources between employer and employees where such issues might be disputed. Business owners who sell their businesses and agree not to compete with the purchaser in the short period afterward are far less sympathetic complainants, and their compliance with restrictive agreements don’t give rise to the same type of public policy concerns.

Litigation of employment non-competes has yielded unclear direction because of the fact-specific nature of the cases and the courts’ quest for “reasonable” outcomes. The Ontario government has now proposed a general prohibition on employers entering into non-compete agreements with employees. Bill 27, the Working for Workers Act, 2021 — which provides an exception for non-competes tied to the sale of a business — will, if and when it receives royal asset, become effective as of the date of initial announcement, October 25, 2021. Employers in competitive sectors may be concerned about departing employees taking the secret sauce of the business to a competitor; that activity is prohibited in its own right, but that, too, is difficult to enforce. What the new legislation will provide is some certainty.

The relevant provisions of the bill are actually quite brief. Perhaps (ironically) the legislators didn’t want other words competing with the core prohibition. There are some noteworthy omissions from the bill.

First, the bill does not prohibit non-solicitation agreements, under which employees agree — once they are no longer employed — not to solicit the employees or customers of the business. These types of covenants may raise fewer public policy concerns because they don’t prohibit employees from moving to other businesses, just certain activities. But, they can have a chilling effect, particularly if the non-solicitation extends to potential customers and/or the industry is one where businesses are focussed on the same group of key clients.

Second, the bill isn’t entirely clear about existing non-competition agreements. Its terms prohibit the entry into such agreements, but given that employment standards laws provide minimum requirements that cannot be avoided by contract, there may be arguments that non-competes not expressly exempted are void.

Third, the proposed law only prohibits the agreements, but does not provide any penalty for so doing. Further, it does not require employers to give notice of the law to employees, not all of whom may read this column or otherwise be aware of the rule change. Some employers may choose to leave these provisions in agreements on the basis that, in the worst case, they’re simply unenforceable, and the potential chilling effect on employees (particularly those not informed of the change in the law) may endure.

The bill makes no distinction between rank-and-file employees and more senior ones; the latter may have greater bargaining power, and access to greater resources to protect their interests. This omission may well have been intentional, though in the minister of labour’s presentation of the bill, he used the example of use of these agreements against fast-food workers. Some of the gaps may be filled by regulations that have not yet been released. If enacted, the bill will provide some clarity in this area, though as noted, it may leave some holes.

Bill 27 also included an obligation on businesses with 25 or more workers to implement a policy giving employees the right to disconnect from work-related communications for short periods, so if you have questions about these gaps, you may not be able to reach the Shepherd for guidance.

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