The New Non-Compete: A Circumvention of Bill 27
Late last year, the Ontario legislature passed Bill 27: Working for Workers Act, 2021 that, among other things, prohibited employers from entering into non-compete agreements with their employees. In response, many employers are attempting to circumvent the legislation by crafting contractual provisions that mimic the effect of non-compete clauses without expressly violating the legislation. It remains to be seen how courts will respond to these quasi-non-compete clauses and employers and employees should proceed with caution.
The Ontario Employment Standards Act, 2000 (“ESA”) now prevents employers from binding their employees to any form of agreement that prohibits them from engaging in any business, work, occupation, profession, project or other activity that is in competition with their employer’s business after the employment relationship ends. There are only two exceptions to this:
- The employee sold or leased the business to the employer, and 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.
These amendments to the ESA are retroactive to October 25, 2021.
Generally speaking, courts have never been fond of non-compete clauses because they are effectively a restraint on trade. Nonetheless, prior to Bill 27, they could be enforceable depending on the length of the restriction, the geographical scope, the clearness and narrowness of the language used, and the overall reasonableness and necessity of the provision.
Employers often included non-compete clauses in employment agreements to deter employees from competing. Without the benefit of legal advice, many employees unnecessarily avoided working in their chosen fields out of fear of violating what was really an unenforceable provision all along.
Now that non-compete provisions are prohibited, employers are pivoting to more creative options. For example, some employers are significantly increasing the amount of notice an employee must provide to resign. Others are creating forfeiture provisions that require employees to choose between a bonus or lengthier severance package and the ability to compete.
While forfeiture provisions tied to deferred incentive compensation or equity are not unusual, they have not often been used as a quid pro quo for cash bonuses or enhanced severance packages. Likewise, although senior employees are often required to provide their employers with lengthier resignation periods, it is uncommon for low or mid-level employees to have to provide more than a few weeks of notice to resign.
Advice for employers
Being creative and trying to work alternative quasi-non-competes into contracts may create more risk than reward. The ESA has been interpreted by the courts to be benefits conferring legislation. In other words, it is intended to be interpreted to the benefit of employees. While employers and employees are free to negotiate their own employment agreements, courts will not hesitate to intervene at the point in which a provision becomes unconscionable. If the whole purpose of Bill 27 is to protect employees from a restraint on trade, a clause that has the same effect as a traditional non-compete clause will likely be deemed unenforceable. This is particular risky for employers in situations where the restriction is tied to termination, because if any component of a termination provision violates the ESA, the entire provision is null and void and the employer will not have a contractual provision to rely on to limit their employees’ entitlements on termination. The benefits of a quasi-non-compete may not outweigh the harm of a void termination provision.
This is especially the case when alternative restrictions are available and enforceable. A properly drafted confidentiality and/or non-solicitation clause can equally protect the interests of an employer without creating unnecessary risk.
Best practice for employers is to first determine whether a quasi-non-compete is absolutely necessary to protect their proprietary interests. If the answer it yes, then it is best to consult with a legal expert that can carefully prepare an enforceable contract with these restrictions in mind.
Advice for employees
New laws create uncertainty.
The consequences of violating an enforceable non-compete clause are significant. Employees risk being sued for the damages for the value of any lost business or clients by their former employer. This can be substantial in certain circumstances.
Given that there are still exceptions to this prohibition, including situations where the employee holds an executive role, and the prohibition does not necessarily apply to contracts entered into prior to October 25, 2021, employees should not assume that they are in the clear.
Likewise, as employers work towards more creative alternatives, employees run the risk of entering into overly restrictive yet enforceable contracts. If those contracts are deemed enforceable, employees are left in virtually the same handcuffed position they would be in had they agreed to a non-compete clause.
Given the uncertainty about how some of these more creative efforts will be viewed by courts, employees may be able to negotiate these clauses out of their contract at the outset.
Remember, as the age old saying goes: if it walks like a duck and quacks like a duck…