Post-employment restrictions face their own restrictions

Non-compete and non-solicitation agreements, also called restrictive covenants, have long been important tools for Canadian employers seeking to protect their legitimate business interests.  

However, the legal landscape governing these restrictive covenants has evolved significantly in recent years, particularly with Ontario's ban on non-competes and proposed restrictions under the Canada Labour Code, the particulars of which are not yet decided.  

Understanding how these agreements function, when they are enforceable, and what limitations exist is essential for employers looking to make use of them. 

The common law framework for enforceability 

Canadian courts have historically taken a cautious approach to enforcing restrictive covenants. As restraints on trade, restrictive covenants will not be enforced unless they satisfy a three-part test established through decades of jurisprudence. 

First, the restriction must unambiguously protect a legitimate proprietary interest of the employer. Courts recognize certain interests as worthy of protection, including trade secrets, confidential business information, and goodwill developed through customer relationships. An employer cannot simply prevent competition; there must be a genuine interest at stake that goes beyond merely limiting an employee's ability to earn a livelihood in their chosen field. 

Second, the restriction must be reasonable in terms of its temporal scope, geographic scope, and the activities it prohibits. Courts scrutinize each element carefully. A temporal restriction that extends for years may be deemed excessive, while a geographic restriction covering an entire province or country may be unreasonable unless the employee's role genuinely extended across that territory. The activities restricted must also be narrowly tailored to the legitimate interest being protected. If a clause extends beyond that scope – take, for example, a non-compete covering all of Canada where the company’s business is exclusively in Ontario – it is very likely void. 

Third, the restriction must be reasonable from the perspective of public interest. Courts will not enforce agreements that unduly restrict competition or prevent individuals from earning a living, even if the restriction serves the employer's interests. This public policy consideration reflects the courts' concern about the broader economic and social implications of restrictive covenants. This factor is not needed, since an agreement that unduly limits competition will also likely run afoul of one or both of the first two steps. 

Distinguishing non-compete and non-solicitation agreements 

While both non-compete and non-solicitation agreements restrict post-employment activities, they differ significantly in scope and enforceability. Non-compete agreements broadly prohibit an employee from working for a competitor or starting a competing business for a specified period within a defined geographic area. These clauses face greater judicial skepticism because they more severely limit an individual's ability to work in their field. 

Non-solicitation agreements, by contrast, are generally more narrowly tailored. They prohibit former employees from soliciting the employer's customers, clients, or employees for a specified period. Because these restrictions interfere less dramatically with an employee's ability to earn a living, courts are more inclined to enforce them, provided they meet the reasonableness requirements. An employee subject to a non-solicitation clause can still work for a competitor; they simply cannot actively pursue their former employer's business relationships or recruit former colleagues. Courts have gone so far as to write that where an existing non-solicitation covenant will adequately protect the employer’s interest, a non-compete will not be enforced. 

Ontario's ban on non-compete agreements 

The legal landscape shifted in October 2021, when Ontario's Employment Standards Act, 2000 (ESA) was amended to bar non-compete agreements for most employees. Under section Part XV.1 of the ESA, non-compete clauses entered into after that date are void and unenforceable, with two limited but important exceptions: 

• Non-compete agreements remain enforceable in the context of a sale of business, where the seller agrees not to compete with the business being sold. 

• Non-compete agreements are enforceable when applicable to “executives,” defined in the ESA as employees holding 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 any other chief executive position.  

Guidance on the meaning of “executive,” from case law or Ontario’s ESA Interpretation Manual, is minimal. However, the ESA has been consistently interpreted in a manner most favourable to employees. As a result, there is little reason to believe that “any other chief executive position” captures positions outside of the “C-suite.” 

Proposed federal ban under the Canada Labour Code 

Building on Ontario's approach, in its Fall 2025 Budget the federal government proposed amendments to the Canada Labour Code that would prohibit non-compete agreements for federally regulated employees. These proposals would affect workers in industries such as banking, telecommunications, interprovincial transportation, and other sectors under federal jurisdiction. 

The proposed ban mirrors Ontario's approach in many respects, aiming to enhance worker mobility and promote competition. Consultations over the scope of the ban and any exemptions are ongoing. Given the federal government’s strong statements in favour of worker mobility, it is possible that any bar will be more strenuous than that in Ontario. 

For Canadian employers, reliance on non-competes has come at a risk for several years. With Ontario and the federal government proceeding with statutory bars on non-competes, it seems likely that other jurisdictions will follow suit. This does not mean that non-competes will lose their purpose; rather, that purpose will only be served in a very limited number of cases. In effect, if the employee agreeing to a non-compete is not so crucial to a business that their engagement by a competitor would cause direct and verifiable harm, enforceability will be a real challenge. 

Since notional severance or “blue penciling” an agreement is only permitted in a limited number of cases, relying on a clause that may be struck in its entirety is dangerous. In most cases, employers need to consider other means of protecting their interests following the end of the employment relationship, including by using appropriately tailored non-solicitation and confidentiality covenants. Ensuring the return of sensitive and confidential information immediately after termination can also help. While non-competes will often be “non-starters,” the fundamental harm that non-competes are designed to prevent – the loss of revenue and goodwill – can still be addressed in other ways. 

Kyle Lambert is a partner in the Litigation & Dispute Resolution and Employment & Labour Relations groups at McMillan LLP in Toronto.