Federal ban on non-competes — a look at what HR needs to know

Employers across Canada are being urged to review their employment agreements as the federal government moves to ban non-compete clauses — a shift that legal experts say could mark the beginning of a national trend.

The proposed federal rules are closely modeled on changes Ontario made to its Employment Standards Act a few years ago — and George Vuicic, a partner at Norton Rose Fulbright in Toronto, believes the trend will spread.

“One jurisdiction will adopt a change and then over time we see that being adopted in other jurisdictions so I wouldn’t be surprised if we start to see that play out elsewhere," he says, pointing to Manitoba and British Columbia as possibilities given their NDP governments.

As of June 3, Bill C-31 had had its second reading and been referred to committee.

Employment agreements under scrutiny

The proposed legislation, which would apply to federally regulated industries such as banking, telecom and transportation, makes it explicitly prohibited “for an employer to agree to a non-compete clause or other employment-related restriction with an employee or trade union or impose one on an employee, including by inducing the employee to agree to one."

Any such clause would be void and any employers that retaliate against employees for refusing to sign — through dismissal, demotion, discipline or decisions around promotion or training — would also be in contravention of the law.

While it was already difficult for employers to enforce a non-compete —other than in more exceptional circumstances — Vuicic recommends they review their employment agreements and remove any non-compete language given the proposed legislation.

Having non-compete language in an employment agreement — even a clause that might never be enforced — "definitely could be problematic," he says, and is reason enough to review and remove it.

Employers across Canada should make the assumption that Bill C31 will pass, with potential ramifications down the line even if you’re not federally regulated.

"It's prudent even, in the absence of any statutory changes, to go back and look at your restrictive covenants and see, even based on the current common law, ‘Are they enforceable, are they reasonable?’" says Vuicic.

“For employers across Canada, this may be the start of a trend.”

Business sale exemption

The legislation preserves non-competes in two specific situations: the sale of a business and employees at the highest executive level, and the wording is similar to the legislation in Ontario, says Vuicic.

On the sale-of-business side, the legislation says the exemption applies to "a person who leases or transfers, by sale, merger or otherwise, their work, undertaking or business, or any part of it, to an employer and, immediately following the lease or transfer, becomes an employee of that employer" — provided the non-compete is agreed to as part of that transaction.

The rationale is longstanding, according to Vuicic: "There are all kinds of valid reasons why if you're purchasing a business, you want to make sure that the seller isn't going to turn around and compete against you.”

In the transactional setting, the issue of non-compete often arises, says Katy Allen, a partner at Osler in Vancouver.

"Not every transaction is as cut and dry as a vendor staying on as an employee post-closing in the same role. Sometimes there's complexity," she says, adding that case law out of Ontario should provide guidance for federally regulated employers.

C-suite exemption for non-competes

The C-suite exemption covers the CEO, president, and chief officers — CFO, COO, CHRO, CIO, CTO, CLO — who report directly to the CEO. Critically, the legislation specifies it applies to "the only employee who holds the position or performs the functions" of each of those roles.

For organizations with layered executive structures, the definition might create challenges, says Vuicic.

"A lot of organizations have a high number of vice-presidents, for example," he says, pointing to banks and insurance companies with large numbers of “notionally” executive employees.

"Under this definition, if they don't report to the CEO, are the executives going to be captured? Maybe not. So, I think there may be some litigation over that… If an employer is really concerned about someone being able to compete against them, make them an executive."

However, non-competes are pretty difficult to enforce in a lot of cases, says Allen, so promoting a person to have that option “would be, of course, a balancing for the individual circumstances,” she says, citing the risks of artificially increasing someone’s role above what they’re actually performing as.

“It would be a case-by-case analysis but I think often that would not be the favourable side to land on.”

Burden of proof on employers

Notably, the burden of proof under the proposed law falls squarely on the employer, says the legislation:

“If… an employer alleges that a term or condition of employment or a clause of an agreement is not a non-compete clause or other employment-related restriction or that a non-compete clause or other employment-related restriction is not void or, in Quebec, not null, the burden of proof is on the employer.”

This means that federally regulated employers will bear the burden of proof to show that a term or condition in an agreement is not a non-compete clause or other employment-related restriction, says Allen.

“And then if it is a non-compete clause, you'll also have the burden of proof to prove that it's not void — so, for instance, by proving it's a CEO or other excluded person."

Employers with non-competes already in place have a transition period: the void provision does not apply until the first anniversary of the day on which the prohibition comes into force, for agreements already in effect on that date.

This is a meaningful distinction from how Ontario's law was implemented in 2021, where non-competes signed prior to then are still arguably enforceable, says Allen.

“Of course, they still have to pass the common law test, whereas Bill C31 contemplates a one-year transition period, after which anything that's offside this new rule would be unenforceable," she says. “So, there’s a bit of a distinction there.”

‘Other’ restrictions in Bill C-31

The proposed law does define "other employment-related restriction" as a term or condition of employment or a clause in an agreement "that is not a non-compete clause and is part of a class specified in the regulations.”

Vuicic reads that as a placeholder rather than an immediate signal of further change.

"What does that mean and what would the government do there? We have no idea at this point. There’s no indication it’ll be defined by regulation — it may just be that the government's leaving that door open to add additional restrictions," he says.

"We often see that there'll be new legislation that includes the power to adopt regulations, and then for some period, there's nothing that's done for weeks, months, years even. And then way down the road, at some point the government introduces regulation.”

Non-solicitation clauses, he says, are generally viewed as fair game for now.

"It's not prohibiting anyone from competing against you — it's just saying, ‘You can't come back and try and poach away the customers or employees that you worked with when you were here.’”

However, Vuicic says that could change “because one of the principles of our system is employee mobility."

Allen points to one category that could be a specific target of future regulation.

"There are some clauses that are thought of as 'no doing business with'-type clauses or ‘no-dealing’ restrictions that are a hybrid between a non-solicit and a non-compete," she says. "It's possible that they would, by regulation, make it clear that those sorts of in-betweeners are offside — but that remains to be seen."

Getting non-competes right

For employers in situations where a non-compete remains permissible — a business sale or a true C-suite hire — problems can arise when it comes to the reason for the restriction and the scope, both geographically and time wise, he says.

A five-year non-compete for a janitor, for example, is not going to be upheld, says Vuicic, “but if you have a senior executive and you say, ‘You can't compete in this area of our business within the city of Toronto for a period of one year after your employment’” — that has a far stronger chance of standing, he says.

In any non-compete or non-solicit or other type of restrictive covenant — putting aside the legislative prohibitions that may apply, depending on the jurisdiction — you also have to pass the common law test, says Allen.

"In the employment context, it's presumptively an unenforceable clause unless the employer can prove that it's reasonable in terms of scope, such as geographical scope, duration, and that it's designed to protect a legitimate proprietary interest."

For employers outside federal jurisdiction, she says non-competes should not be abandoned simply because of the legislative trend.

"I wouldn't shy away from including non-compete clauses where they are reasonable and necessary to protect your legitimate proprietary interests as a business," she says. "They'll have a much better chance of enforceability if they're current and bespoke."

Consideration for changing terms

If HR wants to amend an employment agreement to include a non-competition clause, they must provide an additional benefit in exchange for the employee agreeing to the change, he says.

"You can't just unilaterally say, ‘We're amending your contract — there's a new clause, here it is,’" says Vuicic. "You have to give the employee something to which they weren't already entitled."

A signing bonus, promotion, raise or meaningful non-monetary benefit can satisfy that requirement, he says.

“It's up to the parties to decide what's of value. Realistically, however, I've seen courts be very skeptical of what they view as notional or nominal or minimal consideration.”

A promotion is a natural opportunity to revisit an agreement, says Allen, and the pay increase would likely be considered a valid consideration for a new employment agreement with the existing employee.

"You also want to look at your other clauses that are protecting your proprietary and confidential information — confidentiality, intellectual property, non-solicitation. It’s always a good practice to refresh those as well when someone's being moved up."

And if an employee pushes back against the non-compete or wants to negotiate the terms, that process can work in the employer's favour, says Vuicic.

"If you can show, ‘Look, we didn't just impose this clause, it was negotiated’ — there's some back and forth, they retained a lawyer, the lawyers negotiated this — it shows sophistication in the negotiations that can help show that the clause is reasonable.”

For federally regulated employers, Allen's immediate advice is to hold off on refreshing agreements until Ottawa provides more clarity.

"Unless the employer is willing to just do away with its non-compete clauses entirely, I think we'd want to see what happens in the regulations before we put pen to paper," she says.

In the meantime, staying on top of Ontario case law — which is still developing around the exemptions, particularly in transactional settings — will be useful guidance, according to Allen.