Understanding Non-Compete Agreements in Ontario
Overview
In 2021, the province of Ontario became the first in Canada to prohibit employers from including non-compete agreements in employment contracts. This change aimed to protect employees’ rights, to advance careers and to ensure fair employment practices.
What is a Non-Compete Agreement?
A non-compete agreement usually forms part of an employment contract. It prohibits an employee from engaging in any work or activity in competition with their employer’s business after employment ends. Often this limitation upon future employment is either time limited or geographically in nature.
‘Time limited’ means it applies for a specific amount of time, months or even years, after leaving the current employer.
‘Geographical’ means the employee may not take a job with a similar company within a certain number of kilometers of the current employer.
Key Characteristics of Non-Compete Agreements
Time-Limited or Geographically Restricted
An agreement is considered a non-compete agreement when it specifies a duration or geographical boundary of the employee’s future employment. For example, in an employment contract, if there is any verbiage:
- preventing an employee from working in a competing business for six months after leaving this employers, that is a non-compete agreement.
- restricting an employee from taking a job with a competing company located within a X number of kilometers of the employer’s location is a non-compete agreement.
Prohibition of Non-Compete Agreements
Under the changes to the Employment Standards Act (ESA), non-compete agreements are prohibited before, during, and after the employment relationship. This means:
- Potential employers cannot include non-compete clauses in agreements with job applicants;
- Current employers cannot enforce non-compete agreements with current employees; and
- Former employers cannot impose non-compete restrictions on their ex-employees.
Exceptions to the Rule
There are exceptions where non-compete agreements are allowed. For instance:
- Sale of a Business: If you sell your business, and take a job with the new owner, it is not prohibited to be required to agree to a non-compete agreement. The particular requirements in this case would be to ensure your actions do not negatively affect the success of the new owner.
- Executive Positions: The ESA permits non-compete agreements for executive positions. This includes roles of:
- Chief Executive Officer (CEO)
- President
- Chief Financial Officer (CFO)
- Chief Operating Officer (COO)
Non-Compete Agreements Before October 25, 2021
The new requirements do not retroactively invalidate non-compete agreements entered into before October 25, 2021. If you have a non-compete clause in your employment contract, you may still be able to void it, in by consulting a lawyer.
Non-Solicit and Non-Disclosure Agreements
While non-compete agreements are prohibited, the ESA still permits non-solicit and non-disclosure agreements:
- Non-Solicit Agreements: Prevents employees from soliciting the employer’s clients, customers, or other employees upon leaving the company
- Non-Disclosure Agreements: Restricts employees from sharing confidential company information with anyone, including competitors companies
An employer may enforce compliance with these agreements, by suing an employee or former employee.
Terminology in Contracts
Sometimes an employment contract may have non-compete requirements which are not clearly identified as such. It is up to the employee, or their lawyer, to ensure the employment contract does not have these limitations, not whether or not a particular paragraph is labeled this way.
Conclusion
For both employers and employees, it is important to understand the legal implications of non-compete agreements in Ontario. These are now generally prohibited because they interfere with workers’ rights. Although some exceptions apply, especially in the context of business sales and top executive roles, a knowledgeable and experienced lawyer can help navigate employment contracts.
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