We recently reported on the introduction of a prohibition on non-compete agreements by the Working for Workers Act 2021.
A non-compete agreement or clause (also known as a non-competition clause) seeks to impose restrictions on the activities that an ex-employee may undertake for a specific period of time after leaving their present employer. They normally provide that the employee will not work for, or start, a business that competes with the former employer for a certain period, and sometimes, within a specific geographical location.
The recent case of Parekh v Schecter in the Ontario Superior Court of Justice examined whether this prohibition applies to non-compete agreements entered into before the date specified in the Act.
The Working for Workers Act Prohibits Employers From Entering into Non-Compete Agreements
The Act amends the Employment Standards Act 2000 and prohibits employers, with some exceptions, from entering into employment contracts or other agreements with employees that are, or that include non-compete agreements. Any such non-compete agreement is void. The ban is deemed to have come into force on October 25, 2021.
Defendant signs non-compete agreement in 2020
In 2020, the plaintiff purchased a dental practice from the defendant’s son. Part of the deal was that the defendant’s father would continue working at the practice for three years. The defendant signed a non-compete clause restricting him from practicing dentistry within a 5 km radius during the term of employment and for two years after, along with a non-solicitation clause and a clause restricting his use of confidential information.
The defendant resigned in 2021 and then began to practice at a dentistry that was just over a 5 km drive away, but that was within the 5 km radius. There was evidence that he also took patient dental moulds, and it was argued that he may have solicited patients because he saw patients that used to attend the original practice in his first few weeks.
The plaintiff sought an interlocutory injunction preventing the defendant from practicing dentistry within the 5 km radius and soliciting any patients, as well as requiring the return of all patient information. This is a discretionary remedy that can be granted by a judge before the trial if, in the case of non-compete clauses, the plaintiff has a strong prima facie case, will suffer irreparable harm if it is not granted and the balance of convenience favours its grant.
The Working For Workers Act Prohibition Does Not Apply to Non-Compete Agreements Entered into Before October 25, 2021
The defendant argued that the Act applied to void the non-compete clause which he entered into prior to the date that the prohibition came into force. He argued that if it did not, it would cause a lack of legal uniformity and create two tiers of employees with different levels of protection.
Justice Sharma disagreed, holding that the provisions in the Act do not apply to contracts of employment with non-compete clauses entered into before October 25, 2021. His Honour explained that new legislation that affects substantive rights is presumed to have only prospective effect unless it is possible to discern a clear legislative intent that it is to apply retrospectively. In this case, the legislature selected a specific entry into force date prior to the date the Bill received Royal Assent on December 2, 2021.
His Honour concluded:
Faced with this express legislative intent to make the [Employment Standards Act 2000] 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.
Non-Compete Agreement Upheld
Having found that the non-compete agreement was not voided by the Act, Justice Sharma turned to the common law principles. His Honour explained that there must be a strong likelihood that the plaintiff will ultimately be successful at trial because a non-compete clause limits a person’s ability to engage in their chosen profession. Covenants in restraint of trade are contrary to the public policy in favour of trade, but certainly, such covenants will be upheld if they are found to be reasonable in the circumstances.
Justice Sharma first determined that the non-compete clause was not ambiguous, in respect of its temporal and geographic scope and in terms of the proscribed activity.
His Honour held that the plaintiff had a strong prima facie case to enforce the non-compete clause. Even though the defendant did not receive payment for goodwill upon the sale of the practice (his son did), the evidence suggested that the clause was more closely attached to the contract for the sale of the business as compared to one prepared in an employment context. The defendant continued to exercise significant managerial control, was directly involved in negotiating his agreement and sizeable goodwill in the practice was due to his reputation. Justice Sharma found that it was not unreasonable with reference to the public interest. It was negotiated in the context of the sale of the goodwill of the dental practice and the purchase price exceeded the assessed value.
His Honour decided that the plaintiff would suffer irreparable harm if the injunction was not granted. It would be unjust to confine the plaintiffs to a remedy in damages given that a number of patients had already booked appointments with the defendant, suggesting this was just the beginning of a loss of goodwill and market share. Justice Sharma found the balance of convenience favoured granting the injunction. The defendant could still work at a practice outside the 5 km radius. If not granted, there was a risk that the goodwill would continue to diminish as the case slowly made its way to trial.
Contact Haynes Law Firm in Toronto for Highly Skilled Employment Litigation Representation
Haynes Law Firm helps employers and employees throughout Ontario achieve effective solutions to legal issues and conflict management in employment law and civil litigation. Haynes Law Firm can guide you through this developing area of the law. For example, if you require assistance drafting employment contracts that meet the requirements of the Working for Workers Act 2021 and protect your interests, or want high-quality representation in employment litigation, contact us online or call us at 416.593.2731.