Ontario Bars Employee Noncompete Agreements

​Ontario recently became the first Canadian province to bar employers from entering into noncompete agreements with employees.

The ban, which went into effect on Dec. 2, 2021, prohibits agreements that prevent employees from engaging in work or other activities that compete with the employer once the worker leaves the job.

Employers may implement noncompete agreements only with high-ranking company executives and with business owners who sell their firms and start working for the purchaser.

The new law makes it easier for employees to challenge noncompete language by filing complaints with Ontario's labor ministry rather than going to court, where employers already faced difficulty enforcing such contracts, according to legal experts.

"Ontario courts have been hostile to noncompete agreements for a long time," said Noel Courage, an attorney with Bereskin & Parr in Toronto, noting that the new legislation provides clarity for employers and seeks to prevent abuses.

"People who use noncompete agreements know that it is difficult to enforce" but have used them anyway, creating a source of stress for employees, he added. It wasn't practical for most employees to go to court to try to invalidate noncompetes, Courage said.

Noncompete agreements could basically trap people living paycheck to paycheck in their jobs, he said. "Employees now will be much more empowered."

David Fanjoy, an attorney with McMillan in Toronto, said courts routinely refused to enforce the vast majority of such agreements, finding them unreasonable and contrary to public policy because they imposed undue limits on employees' right to seek employment.

"It'll be interesting to see if other provinces follow suit," he said.

More Labor Mobility

"The government's aim with this legislation is to increase labor mobility and freedom, and this legislation should meet this goal by increasing the likelihood that employees are aware that noncompete clauses are unenforceable," Fanjoy said.

"This legislation could also be beneficial to employers, potentially providing them with new candidates and applicants who would have been subject to noncompete agreements. It should also encourage employers to focus even more on retention, knowing that they won't be able to prevent employees from joining a competitor," he added.

Employers should remove noncompete clauses from all employment contracts going forward, except for executive agreements and contracts signed in the context of a business sale, Fanjoy said.

"Employers will also want to ensure that they review, or in many cases draft, agreements governing confidentiality, intellectual property, and nonsolicitation of customers and other employees. Without noncompete clauses to rely upon, employers will want to ensure they are taking these steps to protect their confidential information, their customers and their employees," Fanjoy said.

To protect proprietary information, companies could consider employment contracts that specify their intellectual property ownership and require workers to keep such material confidential, according to Courage.

Unclear If Prohibition Is Retroactive

The courts will likely decide whether the prohibition is retroactive, or the government may clarify the matter when it publishes regulations regarding the new law, according to Fanjoy, who noted a principle in statutory interpretation that retroactive effect must be clearly expressed in legislation.

"Regardless, employers should be cautious in attempting to enforce noncompete clauses, given that the majority of clauses were already unenforceable before this legislation and the risks that a court would find that this ban is indeed retroactive," he added.

For employees, the ability to file a complaint with the labor ministry is significant because it is a free way for employees to enforce their rights, "as opposed to having to bear the expense of hiring a lawyer to review their employment agreement," Fanjoy said.

Change Was Part of Larger Reform

The noncompete prohibition went into effect immediately when it received royal assent as part of Bill 27, Working for Workers Act, 2021, which amends various employment laws with provisions that go into effect at different times.

Among other provisions, the law requires all organizations with at least 25 employees to develop a written policy on disconnecting from work. "Disconnecting from work" means not engaging with or reviewing work-related e-mails, messages, phone calls or video communications outside of certain hours.

Employers have until June 2 to comply with this requirement.

Dinah Wisenberg Brin is a freelance writer and reporter based in Philadelphia.