Do you still have non-competes?

In recent years, the debate around non-competition agreements, or non-competes, has intensified both in Canada and the United States.

Earlier this year, the Federal Trade Commission (FTC) brought in a ban on non-competes — only to have it stopped in late August by a district court.

While the FTC has said it is considering an appeal, the activity south of the border has heightened the focus on these agreements — particularly after Ontario banned the practice three years ago.

As the conversation around non-competes continues to evolve, Jodyann Galvin sees potential for similar bans to spread across Canada.

"Change may be spurred by this proposed ban in the U.S.," says the U.S. attorney with Hodgson Russ who advises clients on the protection of their intellectual property including employee restrictive covenants. "Even though it hasn't been adopted and there is no nationwide ban in the US, I think it has moved the needle pretty significantly, both for employees and employers, not only in the U.S., but probably in Canada and maybe even in Europe.

“I think there's a broader awareness, and I believe this tide is going to continue to change… I do think we will see a lot more activism and legislative action.”

Trends in U.S. to protect employees

Galvin notes that the U.S. has seen waves of scrutiny over non-competes in recent years.

"Non-competes, which are restrictions that typically are clauses in employment agreements, have been under scrutiny, shall we say, across the United States for the last 10 to 15 years," she says, citing court decisions.

Following this legal trend, several U.S. states began considering the appropriateness of non-competes, with four states now banning them entirely, says Galvin.

 "New York State, for example… had legislation pending that was all the way up to the governor's desk, and it was vetoed at the governor's desk just recently.”

The debate reached a critical juncture in early 2023, when the Federal Trade Commission (FTC) proposed a nationwide ban on non-competes, sparking a flurry of activity, she says.

"What the Federal Trade Commission and the U.S. reasoned was that non-competes... were too broad, too restrictive, and squashed innovation because employees were afraid to move.”

Controversy over non-competition agreements

One of the core issues with non-competes is that they are often applied too broadly, covering employees who pose no significant competitive threat, says Galvin.

 "The Federal Trade Commission report focuses on hairdressers, nurses, movie theater managers, bank workers — even tellers at banking institutions — where the breadth of the employee base that was being covered by non-competes really did become unwieldy and overbroad… with no regard to whether the employee really had information or would gain any information during employment that could be competitively harmful.”

Non-competes are often controversial because they are generally viewed, at least here in Canada, as a restraint of trade, says Jordan Epstein, an associate at Gowling in Toronto.

“It is a provision that is friendly toward businesses and employers, and restrictive against employees and the labour force."

Plus, there’s been a growing trend, in Canada, the U.S. and Europe, he says, to “loosen the restrictions on employee mobility and to increase economic activity by way of employees working for other companies in the same industry.”

Push for ban of non-competes

While there is no nationwide ban on non-competes in Canada, Ontario passed restrictions on where an employee can work after their employment ends, in October 2021.

"Employers are no longer permitted to impose non-competition provisions in employment agreements," Epstein says, though this does not apply during the employment relationship, and there are exceptions during the sale of a business and for executive-level employees.

This legislative move has caused Canadian employers to reconsider the use of non-competes more broadly across the provinces, says Galvin.

"Ontario was relatively progressive and one of the first movers to issue this ban," she says, which has prompted employers to take a "harder look" at whether they want to continue using non-competes in other areas.

“It's difficult to recruit employees if you're offering them an employment arrangement that includes a non-compete — employees are much savvier now than they were 20 years ago,” says Galvin.

“For lack of a better phrase, there are classes of employees, and probably 95 per cent of the employees who have non-competes, really should not be subject to that sort of restriction.”

Enforcing non-compete agreements

Even without a ban, enforcement of non-competes is challenging across the country, says Epstein. Courts are generally reluctant to uphold these terms, and the agreements are “highly scrutinized” so any ambiguities or vague language in these agreements tend to be interpreted in favour of the employee.

"The court will only look to enforce a non-compete in rare circumstances when an employer has a genuine interest that needs to be protected, or the employer is particularly vulnerable to the employee given their position or the industry that they work in," he says.

One key issue is the broad application of these agreements, which can unfairly limit an employee’s career prospects, particularly in lower-level or non-executive roles.

"Non-competition agreements should be used sparingly, if at all, and only for particular employees for particular types of industries," Epstein says.

“There has to be specific definitions included in these agreements in order to be clear and enforceable, and they have to also be reasonable with respect to length and time and geographic scope”

For high-level executives or employees with specialized skills, non-competes may still have a place, according to Galvin.

"It's most prominent at those high executive levels or employees who have a very high level of technical skill that may have been developed over years of education or work experience," she says because in these cases, the company's confidential information "does reside with that employee."

Galvin also highlights their relevance in mergers and acquisitions (M&As), where a buyer may want to protect the goodwill of the business being purchased.

"In any purchase, whether it's a full purchase agreement or an asset purchase agreement, those non-competes can be built into the agreements for moving forward from the closing date forward into the future," she says.

Existing agreements with non-competes

One of the lingering challenges with non-competes is that pre-existing agreements may still be enforceable. For example, Ontario’s prohibition only applies to agreements signed after that date, says Epstein.

"If an employee signed a valid non-competition agreement prior to that date, the pre-existing non-compete could still be potentially enforceable," he says, though enforcement remains difficult even in such cases.

When it comes to removing non-competes from existing agreements, Galvin suggests it’s often easier than employers might expect.

"Taking away a restrictive covenant is very easy, and most employees would welcome that opportunity," she says, calling it a “goodwill measure.”

On the other hand, adding a non-compete to an existing agreement is "a little bit trickier," says Galvin, and may require a considerations such as additional compensation in the form of a raise or bonus, to make the clause enforceable.

How Canadian employers in U.S. should respond

For Canadian companies operating in the U.S., Galvin recommends a thorough review of existing agreements.

"I think it's reasonable for a Canadian company that is concerned about this issue to do an audit and figure out ‘What do we have? What state laws apply?’” she says.

“Making decisions on a state-by-state basis, unfortunately, is probably the way to go.”

The same is true for Canadian employers that may have employees in different provinces or territories, says Galvin.

“Where employers have hiccups is where you have longstanding agreements that have just continued to carry over time and don't make sense in today's business climate or today's legal climate,” she says.

“These agreements often reside in dusty human resources files for long-term employees… So I think an audit is really the safest way to go.”

Given the potential changes in the U.S., Epstein advises Canadian employers operating in the U.S. to stay cautious.

“They should be aware that changes could be coming in the future. What I've seen happen in here in Canada as a result of this prohibition is raised awareness about non-competition agreements and the validity of non-competition agreements in Canada,” he says.

“That, generally, is an interesting development because it is perhaps making some employees more aware of their rights than they otherwise were.”

Alternatives to protect business interests

For employers looking to protect their business interests without resorting to non-competes, Epstein suggests alternatives such as non-disclosure agreements (NDAs), confidentiality agreements or non-solicitation agreements.

“The reasoning behind that is that an employer should not be prevented from stopping an employee from working in their chosen industry following employment, but an employee should be restricted from competing unfairly [during] their employment.

In its proposal, the FTC highlighted alternative ways to protect employers’ interests, such as non-disclosure agreements (NDAs) and non-solicitation agreements, says Galvin.

"The FTC essentially wanted to push employers into using those less restrictive mechanisms and move away from the straight non-compete," she says.

"Most employers… are satisfied with the other restrictive covenants like NDAs and non-solicits.”