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Banning of Non-Compete Clauses in Ontario

Jessica Gibson

Associate
January 25, 2022

Ontario’s Bill 27, Working for Workers Act, 2021, received Royal Assent on December 2, 2021. This made Ontario the first jurisdiction in Canada to ban non-competition agreements in the employment context through legislation.

What does Bill 27 mean?

Bill 27 has created a new statutory prohibition of non-competition agreements between employers and employees under Ontario’s Employment Standards Act (ESA).

The new legislation, prohibits employers under the ESA from entering into an agreement with an employee that includes a non-competition clause. A non-competition clause restricts the employee from engaging in activities that are in competition with the employer’s business after the employment relationship ends. There are however, two exceptions to this:

1.      The employee sold or leased the business to the employer but, immediately following the sale or lease, became an employee of the business; or

2.      The employee is the president of, or holds any chief executive position within, the employer’s business.

Those exceptions make sense because in both scenarios it is more likely that the parties involved will have similar bargaining power, comparatively to the average employee. Aside from those two exceptions, Bill 27 prohibits non-competition clauses in agreements entered into with employees on or after October 25, 2021. This prohibition also extends to agreements between job applicants and prospective employers. However, Bill 27 does not apply to independent contractors or other employees outside of the ESA, nor does it apply to agreements outside of an employment context. 

Any non-compete agreement in violation of Bill 27 entered into after October 25, 2021, will be void and unenforceable. The Ministry of Labour has said that the prohibition will not apply retroactively to agreements formed prior to October 25, 2021. This does not mean that all non-competition agreements entered into prior to October 25, 2021 will be enforceable. Non-competition agreements/clauses are still unlikely to be enforced, absent exceptional circumstances, and would have to pass the scrutiny of the courts. 

Why the Change?

There is a longstanding common law presumption that a non-competition clause in an employment agreement is contrary to public policy and generally unenforceable.

Ontario courts (and many courts in BC and other jurisdictions for that matter) have demonstrated they have little tolerance for non-competition clauses particularly those written against the average employee. Little tolerance is also shown by the courts where a confidentiality or non-solicitation clause would have sufficiently protected the employer’s interests in the place of a non-compete clause. The courts’ lack of tolerance towards restrictions on employees’ rights through a non-competition clause is connected to the established fact that employees are at a power disadvantage comparatively to their employers. This recognized power imbalance and the lack of tolerance for non-competition clauses generally has paved the way for Bill 27’s enactment.

According to the Ontario Government, Bill 27 is intended to help workers in Ontario advance their careers, earn more money and give the province a competitive advantage in attracting global talent.

A main concern with non-competition covenants is that they preclude former employees from working in the same industry or business where they had previously worked. These prohibitions therefore freeze employees out of active employment in their industries for a period of time. Typically, non-competition clauses are set for a period of time that often ranges from three months to a year, but we have seen clauses spanning two or even three years. These types of prohibitions have a huge impact on an employee trying to re-enter the job market with the skills and knowledge related to their previous field of work. Further, the protection a non-competition clause offers an employer is minimal, especially in the context of a large corporate employer with various connections and resources.  

Bill 27 also ensures that employers are able to protect their intellectual property; just through clauses that are less broad in their application such as confidentiality or non-solicitation clauses.

A duty of confidentiality is often applied whether or not an employee signs a confidentiality agreement because an employee is generally considered to have a duty of loyalty to their former employers. This duty of loyalty includes not ever revealing or using an employer’s confidential information. A non-solicitation clause restricts a former employee from soliciting clients, potential clients, other employees etc. from their former employer.

Bill 27 has simply legislated the courts treatment of non-competition clauses generally by codifying an employee’s right to be free from an unnecessary restriction of autonomy after leaving employment.

 

Contact us to discuss non-competition issues in more detail!