Is the non-competition clause in your employment contract legal?
If you have a written employment agreement with your employer and you work in an industry or in a position that is highly competitive, chances are that your employment contract has one or more restrictive covenants. Restrictive covenants are clauses that are intended to limit what you can and cannot do (and who you can work with) when the employment relationship ends and includes non-solicitation and non-competition clauses. But are these clauses legal?
On December 2, 2021, Bill 27, the Working for Workers Act, 2021 received Royal Assent and became law in Ontario. Bill 27 amended a number of statutes, including the Employment Standards Act (the “ESA”). A new section, Part XV.1 was included to the ESA, which restricted the legality of non-competition clauses for most employees.
What is a Non-Compete?
The non-competition clause is one of the most legally contested restrictive covenants. Non-compete clauses and agreements seek to prohibit an employee from setting up a new company, working for a competing company, or working in a particular position or industry within a certain timeframe and/or geographic area following the end of employment. Under the new ESA provision, a non-compete is 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.” (ESA section 67.1)
While the common law (i.e., judge made law) has long ruled that non-compete clauses and agreements are not enforceable in most circumstances, many employment contracts included non-compete clauses anyway. Employers would fire off ‘cease and desist’ letters to former employees (and sometimes to the former employee’s new employer) if they felt that the former employee was engaging in new work that was competitive. Employees would also restrict their job prospects for fear of legal action by their former employer.
The new ESA non-compete provision changes all of this. It states:
“No employer shall enter into an employment contract or other agreement with an employee that is, or that includes, a non-compete agreement.” (ESA section 67.2)
And because this ban is now in the ESA, it is not only law in Ontario, but also a standard. So just as the ESA sets standards for minimum wage, minimum vacation, time away from work for pregnancy and parental leave etc. (and an employer cannot force or provide less than the standard), the ESA now directly limits an employer’s ability to include a non-compete clause in an employment agreement.
In addition, unlike the common law where only the employee affected by the non-compete had standing to challenge the enforceability of the clause, now anyone is able to make a complaint about an employer’s non-compliance with the ESA non-compete provision – this includes current or former employees (whether they have signed the offending contract or not), a job candidate, or anyone with a copy of the offending contract.
Some Non-Competes/Restrictive Covenants Remain Legal
The ESA does not ban all non-compete clauses and agreements outright: the new laws exempt employees whose post-employment activities could actually harm their former employer. For example, where there is a sale of a business, the purchaser and the seller can legally enter into a non-compete agreement if the seller becomes an employee of the purchaser.
And employees characterized as executives can legally have non-compete clauses and/or agreements with their employers. The legislation defines an ‘executive’ employee 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.
All that said, even if an employer is legally able to include a non-compete clause in a contract with an employee who is exempt under the ESA, the non-compete clause would still have to be reasonable in the eyes of the law. The factors considered when determining the reasonableness of a non-compete clause or agreement are:
- Whether the employer has a legitimate business interest that it is seeking to protect;
- Whether there is a connection between the non-compete and the business interest to be protected;
- Whether the non-compete excessively impairs the employee’s post-employment activities and prohibits them from working and earning a living.
It is also worth noting that the ESA’s non-compete provisions do not restrict non-compete clauses and agreements for employee who are actively employed with their employer. Section 67.1 (quoted above) only applies to non-compete agreements that restrict employees after the employment relationship ends. So, employees with part-time work or side-hustles that could be competitive with their main employer could still be in breach of employment laws and still face legal action by (and have to pay damages to) their employer if engaging in competitive activities – nothing in the new Part XV.1 of the ESA changes this.
As well, the non-compete provisions found in Part XV.1 of the ESA do not ban employment non-solicitation clauses and agreements: these restrictive covenants continue to remain legal and enforceable. Non-solicitation clauses ban an employee from interfering in the relationships between their current or former employer and its employees, contractors, current and prospective clients, suppliers etc. if the interference could actually or potentially harm the employer.
Gaps in the Legislation for Employers
Based on the way the non-compete provisions in Part XV.1 of the ESA are written, a non-compete would be illegal in agreements with employees in professional service industries such as dentistry, law, veterinary, optometry, chiropractic, which could be problematic for employers in these industries. Many professional service associate employees are hired with the intention that they will later become partners or owners of the employer’s business. These employees often have greater insight into the employer’s business (not unlike executive employees) and can negatively impact the employer’s goodwill after employment ends. For example, if an associate dentist, opens up a dental clinic across the street from their principal employer, there is a good chance that some of the employer’s clients will follow the associate, diminishing the value of the principal dentist’s practice and goodwill.
Also, the term ‘employee’ is defined in the ESA to include a person ‘who supplies services to an employer for wages.’ This could include a contractor, such as an independent contractor (those individuals who work for an employer but not exclusively and/or for short durations) and dependant contractors (those who work for an employer exclusively and/or whose work has some measure of permanence). Based on this broad definition of employee, non-compete clauses in contractor agreements might also be illegal.
However, even if Part XV.1 prohibits non-competes for professional service employees and contractors, an Employer might still be able to protect their business interest by including a liquidated damage clause in their employment agreements with these employees and contractors. A liquidated damage clause in a contract requires one party to pay a pre-determined amount to the other party as compensation for failure to comply with a particular duty or obligation. With this clause, an employer could permit a professional associate employee or contractor to compete, but the former employee or contractor would have to pay damages if their specific activities (such as setting up shop across the street) resulted in a monetary loss to their former employer.
How will the New ESA Non-Compete Provisions Impact You?
As with all employment law matters, it is best for employers and employees to meet with an experienced employment lawyer for guidance on Part XV.1 of the ESA. An employment lawyer can review your employment agreements and discuss how the new legislation will specifically impact you.
That said, for employees, the new legislation will create more freedom to accept work from organizations which are competitive to their current or former employers. And if an employment contract has non-competition clause, the entirety of the written contract could be unenforceable (including clauses that are not-directly related to the non-compete, such as a termination clause). For this reason, it is imperative for employers to do an audit of their workplace to determine whether there are employees or roles that are not exempt under the legislation, and review and update any agreements that contain non-competition clauses.
Consult an Experienced Employment Lawyer
At Advocation, experienced lawyers practice in the fields of labor and employment law. They use their knowledge and skills to counsel and represent clients concerning workplace issues. To schedule your consultation, contact Advocation today.