LEGISLATIVE CHANGES IN ONTARIO LIMIT THE USE OF NON-COMPETE PROVISIONS IN EMPLOYMENT AGREEMENTS
The Province of Ontario has passed an amendment to the Employment Standards Act (ESA), effective December 2, 2021, which limits the use of non-compete clauses in employment agreements in the province.
Historically non-compete clauses have been inserted by employers in employment contracts to attempt to prohibit a departing employee from engaging in a business in competition with their former employer. Often the mere existence of the “non-compete” clause in the employment agreement have had a chilling effect on the departing employee who may be reluctant to expend money for legal advice or defend a lawsuit brought by their former employer against them for an injunction and damages.
The courts, however, have been reluctant to enforce non-compete clauses, often finding that that they are in restraint of trade and unreasonable. For example, the following clause was the subject of extensive litigation in the Ontario case of a travel agency (Donaldson) attempting to stop its employee, Mary Murphy, after she resigned and immediately started working for a competitor in the travel industry: “Mary Murphy agrees that in the event of termination or resignation that she will not solicit or accept business from any corporate accounts or customers that are serviced by Uniglobe Donaldson Travel, directly, or indirectly.”
Donaldson sued Mary Murphy and her new employer for an injunction and damages. A motions judge, affirmed on appeal, decided that the words “or accept business” in the clause made the clause, in effect, a non-compete clause. Secondly, the court decided that the non-compete clause should not be enforced because there was no time limit or geographic limit set out as to how long the restriction would last or how broad the restriction was in terms of geographic area. Thirdly, the court went on to say that it would not, in the circumstances, sever the non-solicitation portion of the clause from the overly broad non-compete portion. It would not, in effect, rewrite the clause as it should have been written.
The amendment to the ESA in December prohibits an employer from including a non- competition clause in an employment agreement. Non-compete agreement is defined as: “…an agreement, or any part of an agreement, between an employer and 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 employer ends.”
There are two important exceptions. The first is that a non-compete clause can still be used in an employment agreement of an “executive”. Executive is defined in the Act as follows: “…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.”
The second exception is in the context of a sale of a business where the seller becomes an employee of the purchaser. Specifically, the Act provides: “If there is a sale of a business or a part of a business and, as 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, the seller becomes an employee of the purchaser.“
As stated above, the amendment is “effective” December 2, 2021, but the Ontario Ministry of Labour has issued a guideline that the prohibition against non-compete clauses is retroactive to October 25, 2021 (the date the legislation was introduced in the Legislature).
In summary:
· Non-compete clauses should not be included in any employment agreements entered into after October 25, 2021 unless the employee is an “executive” (as defined) or is retained as an employee following the sale of a business.
· Non-compete clauses included in employment agreements entered into prior to October 25, 2021 should be reviewed carefully to determine whether they would be even enforceable in the present judicial climate and whether there is any risk, such as happened in the Donaldson case, that any other restrictions in the clause, such as non-solicitation, might be thrown out by the court by virtue of being in the same clause with the non-compete provision.
· Where an employer does wish to use a non-compete provision, consideration should be given to insert such a provision in a separate agreement altogether–to minimize the risk that that a court might find other provisions null and void.
· Courts are reluctant to enforce non-compete provisions of employment agreements and often side with the employee. Duration of time, geographic area and scope of the restriction are all-important. The restriction should not unnecessarily restrain an employee from using her/his experience, skills and talent in the future.
· Non-solicitation clauses prohibiting solicitation by departing employees of customers are still permissible and unaffected by this legislation.
· Similarly, clauses in employment agreements requiring confidentiality and the protection of intellectual property are also unaffected.
· Ontario is the first and only province, so far, to pass legislation prohibiting non-compete clauses and employment agreements in Ontario should contain a provision that the agreement is to be governed by the law of Ontario.
· At present, this legislation is brand new and untested by litigation. There is no case law as yet. Similarly, there are no Regulations to the Act. Case law and Regulations can change the practical effect of the legislation.
· Courts may be influenced subtly by the new provisions of the ESA and end up taking an even stricter view of non-compete clauses in general.
· This is an appropriate time for employers to review any existing non-compete provisions with a lawyer specializing in employment law.
· Going forward, drafting of any non-compete provisions should be carefully tailored to provide maximum protection to the employer in the particular employer-employee relationship in question while still retaining a high degree of certainty that a court will enforce the provision if a lawsuit becomes necessary.
As always, we recommend you always contact your professionals.
ERIC KELDAY