What prohibition? The continued use of illegal non- competes

By: Jessica Donen

My earlier blog post: The New Non-Compete: A Circumvention of Bill 27, discussed how some employers are trying to circumvent the recent prohibition of non-compete clauses by crafting provisions that mimic the effect of non-compete clauses without explicitly violating the legislation.

Now, some months later, I have noticed in my practice that many employers are ignoring the prohibition altogether and continue to present their staff with employment agreements that contain unenforceable non-compete clauses.

Section 67.2 of the Ontario Employment Standards Act (“ESA”) expressly prohibits employers from entering into non-compete agreements with their employees. Presently, there are only two exceptions to this:

1. 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
2. The employee is an “executive.” An “executive” is later defined as “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”.

Given this prohibition, I have questioned why employers are purposefully violating the ESA by continuing to include unenforceable non-compete clauses in their employment agreements. Generally, I have come across three explanations:

1. companies believe the benefits of including non-compete clauses outweigh the harm of knowingly entering into illegal terms. Non-compete clauses intimidate and deter employees from competing. Many employees do not know about the recent addition of section 67.2 to the ESA. Some employees will incorrectly assume the clauses are binding and will avoid competing with their former employers to avoid potential liability;
2. companies have justified the continued inclusion of non-compete clauses because the ESA’s definition of “executive” is arbitrary and too narrow in scope. To date, the courts have not adjudicated this issue. These companies are including non-compete clauses in their employment agreements on the assumption that eventually a court will broaden the definition of “executive” to include other senior employees; and,
3. companies want to ensure that if they promote a senior employee to a C-suite position, there is already a non-compete in their employment agreement that they can rely on.

These views are inadvisable. To employers, the benefits simply do not outweigh the risks.

Many companies do not appreciate the potential consequences of failing to comply with the ESA. Failure to comply with an order, direction or requirement under the ESA is an offence under the Act and can result in a ticket, fine, or even imprisonment in rare circumstances. If prosecuted under section 132 of the ESA, a corporation that contravenes the ESA is guilty of an offense and on conviction is liable to a fine of up to $100,000. This fine increases to up to $250,000 for a second conviction, and up to $500,000 for a third or subsequent conviction. By deliberately including non-compete clauses in employment agreements, employers run the risk of prosecution and a hefty fine.

In addition, an unenforceable clause in an employment agreement may render other important provisions void. If a non-compete clause is affiliated with a termination clause or non-solicitation clause, the illegality of the non-compete clause may render related provisions unenforceable, too. Courts have held that employment agreements must be interpreted as a whole and not on a piecemeal basis. Just this year, the Ontario Superior Court of Justice held in Henderson v Slavkin et al. that an otherwise enforceable termination clause was invalid because of the associated unenforceable confidentiality and conflict of interest clause in the same agreement. By including unenforceable non-compete clauses in employment agreements, employers run the risk of invalidating their otherwise enforceable termination provisions. The exposure created by being unable to rely on a termination provision may be far worse than the limited potential upside of including non-compete clauses in employment agreements.

Finally, as a matter of public policy, courts do not like when employers use their knowledge and positions of power to trick their employees. If illegal non-compete clauses are being inserted in employment agreements to deter employees from competing, it is only a matter of time until a judge censures that type of behaviour and awards an employee damages for this bad-faith conduct.

Accordingly, employers should tread lightly and use other tools that are legally available. Depending on the employer’s goals and concerns, stringent confidentiality and non-solicitation clauses can achieve many of the same goals as non-compete clauses without creating risk as a result of the recent legislative changes. As always, it is wise to seek the help of experienced employment counsel in navigating these issues.