Recently, Ontario has seen a significant shift in the realm of employment contracts. On December 2, 2021, the province became the first jurisdiction in Canada to enact a ban on non-competition agreements. Ontario accomplished this through the passing of Bill 27, a Bill which, among other changes, amended the Employment Standards Act, 2000 ("ESA") to include a prohibition on non-competition clauses between employees and employers.
Although Ontario led Canada in enacting such legislation, it was echoing a wider trend. Several US states have already prohibited such clauses. One hopes that doing so will allow these states, along with Ontario, to achieve their stated goals of greater competition, innovation and employee freedom.
Exceptions
The ban is quite broad, prohibiting both location- and time-based non-competition agreements. However, exceptions still exist. Any non-competition agreements that existed before the Bill was passed remain valid. Employers are also not prohibited from entering into non-compete agreements with executives.
Furthermore, there is an exception where the following occurs:
1. there is a sale or lease of a business or a part of a business that is operated as a sole proprietorship or a partnership;
2. immediately following the sale, the seller becomes an employee of the purchaser;
3. as part of the sale, the purchaser and seller enter into an agreement that prohibits the seller from engaging in any business, work, occupation, profession, project or other activity that is in competition with the purchaser’s business after the sale.
Limitations
These exceptions must still abide by the Canadian limitations on restrictive covenants. Shafron v KRG Insurance Brokers illustrates these limitations quite clearly. In this case, Shafron had sold his insurance agency to KRG and became their employee. The deal included a non-compete clause within the area of “Metro Vancouver”. Today, this agreement would not violate the ESA because it clearly falls within the third exception outlined above.
However, when Shafron left to start an insurance company in Richmond, the Supreme Court ruled that the clause did not apply. The court utilized the standard in Elsley v JG Collins, which stated that restrictive covenants are prima facie unenforceable. The onus is on the employer to prove that they are reasonable. Restrictive covenants must be reasonable in “temporal length, spatial area covered, nature of prohibited activities and overall fairness”. In Shafron, the term “Metro Vancouver” was deemed too vague to create a valid reasonable covenant.
Takeaways
Ultimately, outside of a few exceptions, this legislation has effectively ended non-compete clauses in the province. For the exceptions that exist, they will have to abide by Canada’s strict requirements of reasonability for restrictive covenants. That just leaves one question. Is this a positive development in the realm of labour and employment law?
Non-compete agreements have few proponents in Canada. Policy makers and economists have often railed against non-compete clauses for their supposedly detrimental effects on economic growth and innovation. Champions of individual liberty also dislike these agreements. Although some supporters cite the role these clauses play in protecting trade secrets, maintaining freedom of contract, and incentivizing employers to invest in their employees, they are becoming increasingly outnumbered by the detractors.
The effects that this ban will have on the larger society remain to be seen. For now, just enjoy the ability to work for whomever you want!
-UK
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