We recently reported on Bill 27 – Working for Workers Act 2021. It has now received royal assent and become law in Ontario. It amends the Employment Standards Act 2000 (ESA) and related statutes, granting novel rights to employees and imposing new obligations on employers.

This article looks at one key change introduced by the Working for Workers Act 2021, the introduction of a prohibition on non-compete agreements. This follows on the back of our recent report on the requirement for some larger employers to have a disconnecting from work policy, another important change introduced by the Act.

What do non-compete agreements attempt to do?

A non-compete agreement seeks to impose restrictions on a former employee’s activities after leaving their present employer.

The Ontario Ministry of Labour, Training and Skills Development recently issued guidance on prohibiting non-compete agreements (Guidance). It contains the following examples of non-compete agreements:

An agreement that prohibits the employee from engaging in work that is in competition with the employer’s business for six months after the employment relationship ends is a non-compete agreement…

An agreement that prohibits the employee from engaging in work that is in competition with the employer’s business after the employment relationship ends within 100 km of the employer’s workplace is a non-compete agreement.

Non-compete agreements might be time-limited or geographically restricted. Employers have used them before an employment relationship begins, during and after it ends. They sometimes feature as a clause in employment agreements.

The Working for Workers Act 2021 introduces a prohibition on non-compete agreements

The Working for Workers Act 2021 amended the ESA to prohibit employers from entering into an employment contract or other agreement with an employee that is, or that includes a non-compete agreement. This legislation defines a “non-compete agreement” as:

an agreement, or any part of an agreement, between an employer and an employee that prohibits the employee from engaging in any business, work, occupation, profession, project or other activity that is in competition with the employer’s business after the employment relationship between the employee and the employer ends.

Even prior to the introduction of this amendment, non-compete agreements were often found to be void as a general rule under the common law, except where necessary to protect the employer’s legitimate proprietary interest. This is because they are viewed as a restraint on trade.

However, the Ontario Government has gone further than this. The new amendment to the ESA prohibits employers from entering into non-compete agreements and also definitively provides that if an employer contravenes the prohibition, the non-compete agreement is void.

When does the prohibition on non-compete agreements commence?

The Working for Workers Act 2021 provides that the ban is deemed to have come into force on October 25, 2021. The Guidance confirms that the ESA does not prohibit non-compete agreements that were entered into before that date.

In the recent case of Parekh v Schecter, a former employee argued that a non-compete agreement that he signed in 2020 was void due to the new legislative prohibition. Justice Sharma held that, given the express legislative intent to make the ESA amendments applicable as of October 25, 2021, the prohibition on non-compete agreements does not apply to employment contracts containing non-compete clauses entered into before October 25, 2021.

What are the exceptions to the prohibition on non-compete agreements?

The legislation states that the prohibition does not apply in the following two circumstances:

• In the context of a sale or lease of a business, or a part of a business – if, immediately following the sale the seller becomes an employee of the purchaser and, as a part of the sale, the purchaser and seller enter into an agreement that prohibits the seller from engaging in any business, work or activity that is in competition with the purchaser’s business after the sale.
• With respect to an employee who is an “executive” – this word is defined in the legislation 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.

These exceptions to the prohibition on non-compete agreements do not impact the position under the common law. As such, it is possible that such an agreement may still be unenforceable.

Are non-solicitation and non-disclosure agreements still permitted?

The new prohibition in the Working for Workers Act 2021 only applies to non-competition agreements and only in an employment context.

Importantly, the ESA does not prohibit other types of agreements that are designed to protect the employer. For example, it does not prohibit:

• Non-solicit agreements – these prohibit an employee from soliciting clients, customers, vendors, business partners or other employees of the employer, during the employment relationship and normally for a specified period after the employment relationship ends.
• Non-disclosure agreements – these prohibit an employee from sharing confidential company information and processes.
• Intellectual property agreements – these often assign intellectual property produced by an employee during their employment to the employer.

Contact Toronto Employment Lawyers To Understand Your Legal Rights And Obligations Under The Working For Workers Act

To discuss how these amendments may affect you or your business, please contact the seasoned labour and employment lawyers at GGFH LLP in Toronto. Our employment lawyers have long been at the forefront of employment and labour law and have been recognized as leaders by our peers. If you need guidance with a workplace-related issue, contact us online or at 416.364.9599.