You might have seen or been subject to an employment contract that contains a provision preventing the employee from engaging in work that is in competition with the employer’s business for a period of time after the employment relationship ends. Even if this type of clause wouldn’t be relied upon by the employer or enforced by a court, it could still have a chilling effect on the ability of the employee to seek future employment in a related field.
A new piece of legislation, the Working for Workers Act 2021, has been passed in Ontario which amends various statutes with respect to employment and labour matters. It received royal assent and became law in Ontario on December 2, 2021. We have previously examined the right to disconnect created by the Act.
This article looks at another key change brought about by the new Act – the introduction of a prohibition on non-compete agreements.
What is a Non-Compete Agreement?
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 Act defines a non-compete agreement 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.
What does the Working for Workers Act do?
The Act amends the Employment Standards Act 2000 and prohibits employers from entering into employment contracts or other agreements with employees that are, or that include non-compete agreements. The ban applies retroactively from October 25, 2021.
Monte McNaughton, the Minister of Labour, Training and Skills Development said:
These agreements … [aren’t] fair to workers who are eager to advance their careers and this isn’t fair to the thousands of small start-ups we have in Ontario who are starved for talent. This change would help them find workers with the skills they need to scale up, grow and prosper.
What are the specifics of the prohibition and the exceptions?
The Act 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. Any such non-compete agreement is void. The Ontario Ministry of Labour, Training and Skills Development has said that the prohibition does not apply to non-compete agreements entered into before October 25, 2021.
The only exceptions to this prohibition are employment contracts for executives and non-compete clauses in the context of the sale of a business. Firstly, an executive is defined as:
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.
Secondly, if there is a sale or lease of a business and the parties enter into an agreement that prevents the seller from engaging in an activity that is in competition with the purchaser’s business after the sale and, immediately following the sale, the seller becomes an employee of the purchaser, the prohibition does not apply.
What has the Working for Workers Act Really Changed?
Non-Compete Agreements are Void as a General Rule Under the Common Law
It is arguable that not much has changed. Canadian courts have generally considered non-compete agreements to be unenforceable restraints on trade anyway, except in exceptional cases where they are necessary to protect the employer’s legitimate proprietary interest. Courts are reluctant to place unreasonable limitations on an individual’s ability to obtain new employment.
However, some companies have required current or prospective employees to sign non-compete agreements as a condition of employment, and employers have threatened or commenced litigation in reliance on such agreements. The prohibition in the new Act is designed to address the chilling effect that non-compete agreements have on employee mobility. The Government of Ontario has said that it wishes to enhance worker mobility, fair competition and innovation.
The Prohibition in the Act Only Applies to the Employment Relationship and Does Not Prevent Reliance on Narrower Clauses
The prohibition in the new Act only applies to non-compete agreements in the employment context. It doesn’t apply to other types of arrangements, such as independent contractors.
Furthermore, the Act does not do anything in relation to other types of clauses in employment contracts that are designed to protect the employer’s interests. These include non-solicitation clauses, which aim to prevent employees from contacting or soliciting business from former clients when employed by a new employer, as well as confidentiality, non-disclosure and intellectual property provisions.
Contact Haynes Law Firm in Toronto for Assistance with Drafting or Reviewing Employment Contracts
This change to the law has created some uncertainty, for example, whether an exception applies in the context of an employee that performs executive-type duties but under a title not listed in the definition of “executive” in the new Act. It has also created risks for employers, such as the possibility of other provisions being deemed void if inseparable from non-compete clauses. As such, it is important to get advice from a seasoned employment lawyer on your particular circumstances.
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, contact us online or call us at 416.593.2731.