Should non-compete clauses be banned?

Ontario government looking to prohibit restrictive covenant to attract global talent

Should non-compete clauses be banned?

They’re used all the time, though not always enforceable – so what kind of an impact will a proposed ban of non-compete agreements have in Ontario?

As part of the Working for Workers Act, 2021, employers would be prohibited from using non-compete agreements. These types of contracts often restrict employees from taking new jobs with another business in the same field after they leave the company, says the government.

“The proposed changes would ban this unfair restriction to help workers in Ontario advance their careers and earn more money. This would also give the province a competitive advantage in attracting global talent. Employers would still be able to protect their intellectual property through narrower clauses.”

Most employers know that these clauses are there just as deterrents, says Hilary Page, lawyer at Spring Law in Toronto.

“I don't know if any employer is going to be devastated by having these clauses in their existing contracts voided.”

But it’s likely that the law will pass, says Christopher Achkar, employment and litigation lawyer at Achkar Law in Toronto.

“This is something that employers in Ontario will have to put their mind to when they're introducing new employment agreements.”

The government is hoping to bring in the ban to justify the need to attract talent, but that might not work, says Achkar.

“Maybe it will have the effect that it's supposed to have, which is attracting employees to come and work in Ontario, not fearing that if they stopped working here, they could continue working somewhere else fairly quickly, without having to worry about being stopped by their employer,” he says.

“It could also have the opposite effect if employers then get too scared from not being able to stop certain employees from jumping ship and competing.”

Judging by a recent survey, poaching talent from other companies and competitors simply makes sense – especially with the pandemic.

Popular but not always enforceable

Non-compete clauses are very common in employment agreements, along with non-solicitation clauses, but they’re more often negotiated for higher-up positions, says Achkar.

“Almost always, these two clauses are included alongside things like restrictive covenants and intellectual property protections, and all sorts of ‘legal jargon’ that gets entered into agreements.”

But often these agreements are challenged, especially with executive positions, he says.

“A lot of businesses and companies have concerns when their top sales guy, for example, sets up shop down the street, and starts selling the same product or service.”

An earlier B.C. decision provided some clarity as to what’s allowed with such agreements, wrote Stuart Rudner of Rudner Law.

However, the courts usually will not uphold these clauses, particularly when they're not really warranted, like in a lower-level position, says Page.

It’s about the “deterrent effect,” she says, as employees are often concerned about the non-compete clause in their contract if they want to go work for a competitor.

“They're really freaked out… [even though] in most cases, nothing's going happen to them. But they think it's real, and why wouldn't they?”

The non-compete clauses are often seen as a restraint of trade, and usually there’s no justification for that, says Page.

“The courts are going to look for them to be very narrowly drafted, but also very necessary. The employer needs to be actually protecting something. And, usually, they aren't,” she says.

“The court just won't uphold it when it just doesn't make sense, if it’s unreasonably restraining people from working.”

Many non-compete, non-solicitation and confidentiality agreements aren't enforceable, says Laura Williams, founder and principal of Williams HR Law.

But these clauses can be enforceable if they are drafted properly and not overly broad and restrict people from working, says Achkar.

“Some of the issues that would make a non-competition [clause] non-enforceable is if it is too long in duration after the end of the employment with a previous employer. Or, for example, it’s too broad in scope [and would] prevent someone from working in all of Canada... Many judges have ruled previously that these are too restricting and make them unenforceable.”

Going forward

Going forward, employers could avoid having a non-competition clause in their employment agreement while protecting themselves in other ways, such as intellectual property provisions, says Achkar.

“If you're in a rush to get employment agreements and you already have ones with non-competitions, then you can always add a new employment agreement midstream subject to conditions. And that's what a lot of employers will have to do.”

Most importantly, employers still can have non-solicit provisions, says Page.

“Those are usually more useful. And employees always have a duty of confidentiality to a former employer. So they can never use the employer’s confidential information against the employer, to work for a competitor. So those two protections, in most cases, I think, are really enough for employers. And those will remain.”

In a 2017 decision, the Ontario Superior Court of Justice (upheld on appeal) found two former employees and their new employer liable for breach of a non-solicitation agreement that the employees had with their former employer.

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