A ban on non-compete clauses? It may be the new reality.

On October 25, 2021, Ontario's Minister of Labour introduced new legislation that could have a significant impact on employers and employees alike. Bill 27, Working for Workers Act, 2021 ("Bill 27") proposes a ban on non-compete clauses in employment agreements, among other changes to Ontario's employment and labour laws.

Non-compete clauses

Non-compete clauses have for decades been widely used by employers to limit their employees' ability to work for competing businesses following the end of their employment. Originally the aim was to prevent those former employees with significant information and influence over their employer from harming the business interests of the employer. The flip side is that non-compete clauses have impeded labour mobility and therefore free economy.

In recognition of the pervasive effects non-compete clauses can have on employees, the Ontario courts have adopted a very high threshold for the enforceability of such provisions. So much so that judges will presume non-competes to be unenforceable, unless they are proven to be reasonable. In turn, it is difficult to prove that a non-compete clause meets the reasonableness test.

Despite the high threshold, employers continue to include non-compete clauses in employment agreements, if for no other purpose, than to deter employees from pursuing jobs that may impact the employers' business interests. Thus, as workplace lawyers, we continue to see such clauses at play in employment relationships. If passed, Bill 27 could change this.

Proposed ban on non-compete agreements

The proposed bill would amend Ontario's employment standards legislation, the Employment Standards Act (the "ESA"), to add new provisions banning non-compete clauses in employment agreements, with limited exceptions.

Specifically, Bill 27 would add a new Part XV.1 to the ESA that stipulates that "no employer shall enter into an employment contract or other agreement with an employee that is, or that includes, a non-compete agreement." If an employer attempts to enter into a non-compete agreement with an employee, the non-compete agreement would be void.

For the purposes of the ESA, "non-compete agreement" would be defined 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". This definition is broad enough to capture termination of the employment relationship by either the employer or the employee.

Currently, the only contemplated exception for the ban on non-compete agreements is in the context of a sale of a business. In such a case, the seller and purchaser may enter into an agreement that limits the seller's ability to compete immediately following the sale if the seller becomes an employee of the purchaser.

Impact on current non-compete agreements

Non-compete agreements currently contained in employment agreements will be void if this legislation is passed. The question arises, however, whether the inclusion of a non-compete agreement in an otherwise valid employment agreement will result in the whole employment agreement being void? Or just the unlawful non-compete provisions?

Based on the wording of the proposed legislative changes, it appears likely that it would just be the non-compete agreement, rather than the whole employment agreement. This interpretation would also align with the Ontario courts current approach to interpreting employment agreements that contain termination provisions which are void for violating the ESA - it is the termination provisions that are void, not the whole employment agreement.

Impact on fiduciary duty to not compete

In some circumstances, fiduciary employees may owe a common law duty to not compete post-employment. An employee may be a fiduciary if they occupy a position of influence, trust and confidence with respect to their employer. If found to be a fiduciary, an employee will owe common law duties to act in the employer's best interest and avoid conflicts of interest, even following the end of employment. These duties exist regardless of whether there is a written agreement between the employer and employee.

It is unlikely that Bill 27 would change this. The prohibition on non-compete obligations contemplated by Bill 27 appears to only apply to non-compete agreements. A fiduciary's duty of non-competition is not based on a non-compete agreement, however. It arises based on their special position of influence. As a result, it is unlikely that such duties would be limited by the new legislation.

Impact on other restrictive covenants

It is also important to note what Bill 27 would not prohibit. Specifically, Bill 27 does not contemplate any legislative changes that would impact the following:

• Non-compete provisions that operate only during the employment relationship. This aligns with the well-established common-law principle that an employer is entitled to require that employees devote their full-time attention and interests to the employer's business during the employment relationship.
• Non-solicit provisions. It appears that employers would still be free to include non-solicit provisions in their employment agreements. Non-solicit provisions typically limit an employee's ability to solicit or poach the employer's customers or employees following the end of the employment relationship.
• Confidentiality provisions. Employers would still be able to include provisions which protect their confidential information.
• Intellectual property provisions. Similarly, employers' abilities to include provisions or enter agreements relating to intellectual property rights would remain unaffected.

Other changes proposed by Bill 27

Bill 27, if passed, would also result in a number of other changes that could impact Ontario employers and employees. Some of these changes include a "right to disconnect" and licensing requirements for temporary help agencies and recruiters. For more information on the proposed changes, visit the Ontario government's backgrounder on Bill 27.

Takeaways

Generally, employees are presumed to be entitled to compete with their employers following the end of employment. If passed, Bill 27 would confirm and even potentially expand that right. Employers would have a harder time trying to contractually restrict employees' ability to compete after the employment relationship ends.

In light of these potential changes, employers are encouraged to carefully review the wording of their employment agreements and consider whether it is necessary to include restrictions that might fall within the definition of a "non-compete agreement". Employers are encouraged to speak with an employment lawyer when reviewing their employment agreements.

On the flipside, employees are encouraged to seek legal advice about their rights and obligations following the end of employment, including their ability to compete.

Lee Workplace Law has extensive experience in these matters and can help.