In our recent blog, we wrote about Ontario’s Bill 27, the Working for Workers Act, 2021, which proposed new changes to several pieces of legislation, including the Employment Standards Act, 2000. The bill has now passed third reading and received royal assent, making it law.
Under Bill 27, employers are prohibited from entering into employment contracts or other agreements with employees that include a non-compete agreement. Below we discuss this change and how employers can continue to take steps to protect their business.
What is a Non-Competition Agreement?
A non-competition agreement seeks to prevent former employees from working in the same industry or business as their former employer (usually with express time, scope and geographic limitations).
Employers have often used these agreements (or have included non-competition clauses in employment contracts) in order to protect business interests following the termination of an employee’s employment.
Non-Competition Agreements Were Not Treated Favorably by Courts Prior to Legislative Change
Recently, and prior to the passing of the new legislation, non-competition agreements were difficult to enforce in Ontario.
Judges and various decision-makers demonstrated a reticence to enforce these agreements, especially in circumstances where a non-solicitation agreement could reasonably be used as an alternative tool to protect business interests.
Generally speaking, only those non-competition clauses that were pointedly drafted and contained reasonable restrictions with appropriate carve-outs relating to territory and duration of application were being enforced in the province.
New Legislation Restricts But Does Not Abandon Non-Compete Clauses
Under the new legislation in Ontario, employers are prohibited from entering into an agreement with an employee that includes a non-competition clause restricting the employee from engaging in “any . . . activity that is in competition with the employer’s business after the employment relationship between the employee and the employer ends”, unless:
- the employee sold or leased the business to the employer but, immediately following the sale or entering into the lease, became an employee of the business; or
- the employee is the president of or holds any chief executive position within the employer’s business.
Employers May Take Advantage of the Executive Exemption to Protect Their Business
As detailed above, there is an exception in the new legislation for “executives” – these employees may still enter into non-compete agreements with employers.
Executives include “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.”
Employers should seek out legal counsel to determine if they can rely on this exemption to continue to implement non-competition clauses for senior personnel.
Alternative Tools for Employers: Non-Solicitation and Confidentiality Clauses
Given the legislation’s codification of the restriction on the use of non-competition clauses, it is a good time for employers to explore alternative methods for protecting the business.
Well-drafted non-solicitation and confidentiality clauses can achieve a great deal in terms of protecting a company’s interests following termination of employment.
- Confidentiality clauses allow a company to exercise control over the dissemination and use of company trade secrets and confidential information by setting out express terms and expectations relating to what constitutes confidential information and the manner in which such information may be used and disclosed.
- Non-solicitation clauses can be used by companies to prevent departing employees from soliciting clients/customers or employees of the company.
In order to be enforceable, the above clauses need to be reasonable. In terms of non-solicitation clauses, markers of reasonableness can be included by defining the scope and duration of applicability of the clause. It is important to retain counsel to draft these clauses to help achieve enforceability.
Contact Sultan Lawyers in Toronto for Advice on Employment Contracts
If you have any questions relating to changes proposed by the Working for Workers Act or are curious as to how it may affect your specific employment scenario, contact Sultan Lawyers at 416-214-5111 or here.