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Traditionally, workplace non-compete agreements are difficult for employers to legally enforce, but that hasn’t stopped them from including these clauses in hiring contracts. Employers can threaten ex-employees with a lawsuit for violating a non-compete knowing that few workers have the resources or will to withstand a legal battle. In many cases, threats alone serve to discourage workers from accepting better opportunities elsewhere.
This scenario is one of the main reasons why Ontario recently became the first jurisdiction in North America to make workplace non-compete agreements illegal. Unsurprisingly, other jurisdictions are also now following suit and last month the United States Federal Trade Commission, a consumer protection agency, approved a nationwide ban.
Despite Ontario’s ban, many Canadians still remain vulnerable. Especially in my line of business, an ounce of prevention is worth a pound of cure. If you are a Canadian worker who has signed or is being asked to sign a non-compete, here is your quick reference guide.
A non-compete prevents employees and consultants from accepting employment in their industry for a set period of time after leaving a job, whether by resignation or even termination.
Ontario’s Working for Worker’s Act came into force in 2022 and forbids Ontario employers from entering into any agreement with an employee that includes a non-compete. However, there are limitations. The ban only follows Oct. 25, 2021. Therefore, employees who previously signed non-competes are still subject to their terms. As well, the legislation specifically excludes senior executives and individuals who have sold a business and does not apply to federally regulated workers (such as those working for banks or airlines) or independent contractors and consultants.
For all other Canadian workers who signed non-competes, although there is not yet any legislation automatically voiding them, there are legal arguments that have the effect of rendering many of these clauses void.
First, like all workplace contracts, non-competes have to be signed under circumstances that make them legally binding. Non-competes are usually included inside boilerplate terms of offer letters or hiring contracts. This means that employees must be given the document prior to beginning employment. A contract only provided on an employee’s first day is not binding because the terms of employment were created beforehand when the job offer was first accepted.
Employers will sometimes attempt to incorporate non-compete agreements long after employment begins. In this situation, employers are required to provide workers with something of additional value, such as compensation or a promotion (known as consideration), in exchange for their agreement to modify any pre-existing employment terms. If an employer cannot demonstrate that a worker received something of value in exchange for signing a new non-compete, then it will also be void.
In order to be enforceable, a non-compete must be viewed as reasonable. This is where courts retain the discretion to strike down agreements signed by workers where the terms go too far. In the leading Canadian case of Shafron v. KRG Insurance Brokers, the Supreme Court explained that because non-compete agreements present restrictions on an employee’s ability to earn a living, they must be enforced sparingly. As such, the Court reasoned that, as a general rule, in order to be enforceable, a non-compete must not be ambiguous and must be reasonable and completely necessary in the circumstances.
To be viewed as reasonable, courts generally require that the non-compete clause be limited in scope (the types of activities prohibited), duration and geographic area. This is where most non-compete clauses fail, as in my experience, employers who take the “kitchen sink” approach to drafting these contracts by including excessive and unnecessary language have created the type of language that courts are most reluctant to enforce.
The inability of a worker to obtain legal advice before signing a non-compete can be another stumbling block. In one important Canadian case, an otherwise binding non-compete was struck down because the court found the company failed to encourage a worker to seek legal advice and raised the inference that she would lose her job if she did not agree with the terms. This case underscores that, because non-compete clauses can create serious limitations for any recently departed employee, any form of duress or problematic behaviour can be relied upon by a judge to set that contract aside.
A senior executive who signs a non-compete, especially if the terms were negotiated, is far more likely to be bound by it than any other employee. Thus, the farther an employee is from management’s ranks, the more difficulty an employer will have to justify any restriction.
Non-solicitation agreements, which restrict the poaching of customers or employees, are generally viewed as reasonable by the courts. However, there are some non-solicitation clauses that prevent accepting business from former clients, even if there was no solicitation. These clauses are really non-competes in disguise and are often struck down for this reason.
Finally, an individual who violates even a potentially binding non-compete clause still may not be subject to any legal liability if their former employer cannot demonstrate that they suffered actual financial damages because of the violation.
Although scrapping non-competes altogether is a policy that is gaining momentum and may even influence how judges view these cases moving forward, many workers are still stuck in legal limbo. By understanding the difficulties employers face when attempting to enforce non-compete clauses and seeking good legal advice, workers can ensure they are not unfairly restricted.
Daniel A. Lublin is a partner at Whitten & Lublin, representing both employers and employees in workplace legal disputes. He can be reached at Dan@canadaemploymentlawyer.com.